How smart is it to really be 100% debt free?
If you can borrow for an asset that gives you income that's more than the cost of carrying the debt, then go for it. But the kinds of debts you have now aren't those kinds of debt, so get rid of them. "Debt increases your exposure to risk.  What happens if you lose your job, or a major expense comes up and you have to make a hard decision about skipping a loan payment?  Being debt free means you aren't paying money to the bank in interest, and that's money that can go into your pocket. Debt can be a useful tool, however.  It's all about what you do with the money you borrow.  Will you be able to get something back that is worth more than the interest of the loan? A good example is your education.  How much more money will you make with a college degree?  Is it more than you will be paying in interest over the life of the loan?  Then it was probably worth it. Instead of paying down your loans, can you invest that money into something with a better rate of rate of return than the interest rate of the loan?  For example, why pay off your 3% student loan if you can invest in a stock with a 6% return?  The money goes to better use if it is invested.  (Note that most investments count as taxable income, so you have to factor taxes into your effective rate of return.) The caveat to this is that most investments have at least some risk associated with them.  (Stocks don't always go up.)  You have to weigh this when deciding to invest vs pay down debts.  Paying down the debt is more of a ""sure thing"". Another thing to consider: If you have a long-term loan (several years), paying extra principal on a loan early on can turn into a huge savings over the life of the loan, due to power of compound interest.  Extra payments on a mortgage or student loan can be a wise move.  Just make sure you are paying down the principal, not the interest!  (And check for early repayment penalties.)" "The responses here are excellent. I'd add just a couple points. Debt is not generic. It ranges from low (my HELOC is 2.5%) to insane (24% credit card, anyone?).  When I read about the obsession to be completely debt free, I ask questions. Are you saving in your 401(k) at least up to the match? I disagree with the ""debt is evil"" people who advise to ignore retirement savings while paying off every last debt. My company offers a dollar for dollar match on the first 5% of income deposited. So a $60K earner will see a $3000 deposit doubled. 5 years of this, and he has 1/2 a year's income in his retirement account, more with positive returns. (note - for those so fearful of losses, all 401(k) accounts have to offer a fixed income, low risk choice. currently 1% or less, but the opposite of ""I can lose it all"".) After that, paying off the higher debt is great. When it's time to hack away at student debt and mortgage, I am concerned that if it's at the risk of having no savings, I'd hold off. Consider - Two people in homes worth $250K. One has a mortgage of $250K and $100K in the bank. The other has his mortgage paid down to $150K.  When they lose their jobs, the guy with the $100K in the bank has the funds to float himself through a period of unemployment as well as a house the bank is less likely to foreclose on. The guy with no money is in deep trouble, and the bank can sell his house for $150K and run away (after proper foreclosure proceedings of course.) My mortgage is one bill, like any other, and only a bit more than my property tax. I don't lose sleep over it. It will be paid before I retire, and before my 11yr old is off to college. I don't think you stupid for paying your low interest debt at your own pace." You might miss an opportunity or three by strictly avoiding debt, but I can't think of a problem you will create by being debt free. So maybe it isn't the absolutely smartest thing to avoid debt on principle*, but it certainly is pretty smart at the very least. Keep in mind that you NEED to have a cash reserve.  Blindly applying all stray cash to debt reduction is a bad idea.  Your lenders do not care about your balance.  All they care about is your NEXT payment.  It is therefore imperative that you have a cash reserve that can carry these payments for several months.  Having zero cash reserves puts you at high risk for such simple things as the payroll clerk at work missing the monthly deposit (Rare, but it happens.) I've also been in situations where a major client had a cash flow issue and delayed payment, and our company had to borrow to meet payroll that month.  Fortunately, we were in good standing with the bank and had low debt, but it could have been catastrophic for any employees living paycheque to paycheque. No matter what, it is never a bad decision to go 100% debt free.  However, you can make debt work in your favor in some cases (investments, education, etc.), but you need to approach it with a plan and long term strategy. Interest, fees, and loss of value can quickly eat up any gains. I think about debt as a good option for capital investments that offer a return. In my opinion, a house and clothes you need for that new job are good things to borrow for. School is ok, depending on the amount. Car is ok, if it's a 3 year loan. The rest is not good. You should try to carry as little debt as possible, but don't let it dominate your life. If faced between the choice of paying ahead on your student loan and blowing $300 on an XBox, you should pay the loan. If the choice is between taking your kid to the zoo and paying the loan, have fun at the zoo. When you're debt free everything you own feels different. The lack of financial stress in your life goes away. BUT! before you do go gung-ho on paying down debt think through these steps (and no I did not come up with them. Dave Ramsey did and others). Truncated from - http://www.daveramsey.com/new/baby-steps/ I have 1 credit card. Only use it for business/travel but pay it off every month (yay for auto-draft). Everthing else is cash/debit and we live by a budget. If it's not in the budget we don't buy it. Easy as pie. The hard part is disciplining yourself to wait. Our society is gear for BUY NOW! PAY LATER! and well you can see where that has taken our country and families. And celebrate the small victories. Pay off 1 debt then go have a nice dinner. Things like that help keep you motivated and pursuing the end goal. "The day I paid my last student loan payment and my last car payment was (January 4, 2000) a very happy day for me, being then 100% debt free.  It is a very good feeling, especially since I was saving cash as well.  It's a great thing to know that no-one ""owns"" you. Many others here have provided useful information about debt, and I know that paying off your existing loans will improve your credit rating, in case you want to go back into debt (which I did later in 2000, by buying a house). For most people, borrowing money to invest it is complicated (make sure you're not paying more on your borrowed $ than you make on your investment) due to the fact that most investments have risk involved. I would say that being debt-free is a very good goal, and there's a level of freedom it gives you.  Just make sure you have your ""rainy day"" fund building while you're on your way to getting there." "Would you run a marathon with ankle weights on?  It starts off as ankle weights, but then grows into a ball and chain as you dig yourself a little deeper each time you use your credit card (and then don't payoff the balance because ""something more important came up""). I would love for my wife to be able to be home and raise our son, but we simply can't afford to do that with the amount of debt we have. We are clawing our way out, and will pay off one student loan and a car loan, then start saving for a house and once we have that, we'll get back to debt reduction. Get debt free.  That's where we are headed.  Most of it is student loans at this point, but debt will take away your freedom to do whatever you like down the line.  It just increases your overhead in the long run." "100% debt free is an objective. Being there is good, but as long as you have a plan to get there, are sticking to it and it's moving you towards it at a reasonable rate (e.g. ""I will be debt free by the end of 2011.""), you should be in good shape. It's when you don't ever expect to be debt free that you have a problem. Going into debt is one question and a very situation dependent one. Getting back out is another and a very easy one: pay off all debts as a fast as you reasonably can, starting with the highest interest ones. OTOH this doesn't imply that you should forgo every optional expense (including things like savings and entertainment) to pay off debts, that would be unreasonable, but just that paying down debts should always be considered when thinking about what to do with money." "This is a ""stress"" period, much like the 1930s and 1970s. At a time like this, it is smart to be debt free, and to have money saved for the likely emergencies. There are growth periods like those of the 1980s and 1990s, probably returning in the 2020s and 2030s. At such times, it makes sense to play it a little ""looser"" and borrow money for investments. But the first order of business in answering this question is to look around you and figure out what is going on in the world (stress or growth)." As others mentioned, the only clear reason to remain in debt is if you can find an investment that yields more than what you're paying to maintain the debt. This can happen if a debt was established during low-rate period and you're in a high-rate period (not what is happening now.) A speculative reason to keep debt is as an inflation bet. If you believe money will shortly lose value, you are better off postponing repayment until the drop occurs. However you're not likely to be able to make these bets successfully. Hope this helps Having no debt should be the ultimate goal for every household, IMHO, but at what cost? As an example, I had some clients (before they started working with me) that had outstanding debt when they retired and were gung-ho to pay it off.  They opted to take it out of their retirement accounts.  They didn't set aside enough for taxes which was their first mistake.    After a few years, they now have realized they should not have paid off everything as now they have other medical issues that have arisen and not enough in their retirement accounts to satisfy their monthly requirement. A Simple Rule to discern between good and bad debt: Does this mean you should never buy a house or car? Of course not.  But if you accrue bad debt, make sure that you can handle it and understand the costs and repercussions. My take is that there are many factors to consider when deciding whether to accelerate payment of a debt beyond the require minimum. Ideally you would want to be debt-free with a home owned outright, a pension big enough to lead a nice life for the rest of your days and plenty of savings to cover any unexpected expenses. Being debt-free is not a bad thing but it should not come at the expense of your overall financial health. Very smart.  Let other people pay you interest.  Don't pay other people interest.  And, yes, I know it's possible to borrow money from one place and lend it to another place at a slightly higher rate, but why bother. Considering that we are in a low-interest rate period (the lowest in history), it's smart to loan money from the bank to reinvest in property or other investments as far as you get a better yield (ROI) than the interest. Around 3 months back, I paid back my last loan from my father which he gave for the car. Now I am totally debt free from 2 months. I have paid back following loans, 1. Education loan. 2. Car loan. I don't have my own property yet. I have a 3 months emergency fund saved which helps me overcome if there is a sudden expense. Overall, its a great idea to be debt free. I used to get extreme thoughts while I had a loan. I paid back and now I am doing good.
"A lot of your options depends on the type of debt you have.  If you're single, young, and have lots of credit card debt then don't discount bankruptcy.  It's definitely not an ""appealing"" thought I'm sure, but it's an option.  One thing I did was completely cut myself off from most forms of credit (credit cards and personal credit loans).  I know my weaknesses.  I will never, ever, ever, get another credit card.  I'm probably older than you are and have lived with debt for a long time.  I'm pretty much debt free; at least from debts that are not covered 100% by assets.  It took a long time.  Keep your spirits up.  Maybe try contacting a credit councilor; one of the real ones that aren't paid for by credit card companies.  I've known people that took that route." This is how its done  I am a certain french bank, aka sg  I have some PIIGS debt, I can use this as collateral at face value (100), with the ECB in order to secure cash... Lets say I use 1mn of BTPS (italian debt), this has an MTM (clean) of 88.  I use that 88 to get me 100 (1mn) of cash, from which I buy another BTPS, for (88), of which I use as collateral pledged to the ECB to get this, get another BTPS.  So now I am long 3 BTPS, all pledged to the ECB and I have 36 in cash and I owe the ECB 300+r in 3 years.  remember the yield on my shitty btps is a lot higher than the interest on the deposits.  Secondly, I have three years, so I don't need to give a fuck about the mark to market on the notes (I could even buy a 2 year and n month note maturing just before). So I can make some free yield at the ECB's expense.  Also this frees up 36 in cash, of which I can use to meet short term funding instead of tapping the bond market, this trade can be made infinitely, although the ECB might catch on.  You can view it as getting a mortgage on your house to buy another house, then mortgaging house #2 to buy house #3, and so on. First of all a big thumbs up for Ben's answer.   A few small things you can do to help you on your way.  Hopefully you are not more in debt that 6 months of salary in debt because that is a really tough road. first thing you need to do is get some professional help. The National Foundation for Credit Counseling (NFCC) offers free or low-cost debt counseling to help you through the process. Visit them at NFCC.org or call 1-800-388-2227 to find a local affiliate office near you. You might want to only use cash for a while. If not and you have a credit card with no balance always use that card because it will be interest free.  Remember if you use credit cards as a payment system and not credit, you actually get free interest.  If you roll even a penny over into the next statement you are paying interest day one of each purchase. Pay credit cards with highest interest rate first an pay minimums to others This one I like the best.  As you get money pay your credit card.  You interest is being compounded daily.  Pay your cards when you have money, not when they are due.   Have a mindset that reminds how much something is really going to cost you If you plan on taking 3 years to get out of debt and you buy something for $100 that is really costs you $156.08 Three years of compound 16% interest.   5b. Conversely if you sell something for $100 on eBay that is like selling something for $156.08. I have been in a similar position as you for the past few years. I put a bunch of cash into a tax free savings account (canadian) instead of paying down debt.   My rationale was that I wanted the exposure to the market and had to be in it in order to pay attention. I also put money into an rasp,  but only because my employer matched it (100% gain, no brainer).  Looking back, I think it would have been a better idea to get debt free sooner. Having that debt weighs on you and haunts everything you try to do. You can't afford rent where you want to be, where you should be. There's no keeping up with the Jones' if you're paying off debt.  That being said, in Canada your student loans are secured and if you lose your job, the government makes payments for you. If your loans are structured like this, then you are better off hanging onto that money. Excellent question and it is a debate that is often raised.  Mathematically you are probably best off using option #1.  Any money that is above and beyond minimum payments earns a pretty high interest rate, about 6.82% in the form of saved interest payments. The problem is you are likely to get discouraged.  Personal finance is a lot about behavior, and after working at this for a year, and still having 5 loans, albeit a lower balance, might take a bit of fight out of you. Paying off such a large balance, in a reasonable time, will take a lot of fight. With the debt snowball, you pay the minimum to the student loan, save in an outside account, and when it is large enough, you execute option #2.  So a year from now you might only have three loans instead of five.  If you behaved exactly the same your balance would be higher after that year then using the previous method. However often one does not behave the same.  Because the goals are shorter and more attainable it is easier to delay some gratification.  The 8 dollars you are saving in your weekly gas budget, because of low prices, is meaningful when saving for a 4K goal, where it is meaningless when looking at it as a 74K goal.  With the 4K goal you are more apt to put that money in your savings, where the 74K goal you might spend it on a latte. For me, the debt snowball worked really well. With either option make sure that excess payments actually go to a reduction in principle not a prepayment of interest.  Given this you may be left with no option.  For example if method #1 you only prepay interest, you are forced to use option #2. You need to pay off the entire balance of 7450 as soon as possible. This should be your primary financial goal at this point above anything else. A basic structure that you can follow is this: Is the £1500 balance with the 39.9% interest rate the obvious starting point here? Yes, that is fine. But all the cards and overdraft debts need to be treated with the same urgency! What are the prospects for improving my credit score in say the next 6-12 months enough to get a 0% balance transfer or loan for consolidation? This should not be a primary concern of yours if you want to move on with your financial life. Debt consolidation will not help you achieve the goals you have described (home ownership, financial stability). If you follow the advice here, by the time you get to the point of being eligible, you may not see enough savings in interest to make it worth the hassle. Focus on the hard stuff and pay off the balances. Is that realistic, or am I looking at a longer term struggle? You are looking at a significant struggle. If it was easy you would not be asking this question! The length of time will be determined by your choices: how aggressively you will cut your lifestyle, take on extra jobs, and place additional payments on your debt.  By being that extreme, you will actually start to see progress, which will be encouraging. If you go in half-committed, your progress will show as much and it will be demotivating. Much of your success will hinge on your mental and emotional toughness to push through the hard work of delaying pleasure and paying off these balances. That is just my personal experience, so you can take it or leave it. :) The credit score will take care of itself if you follow this method, so don't worry about it. Good Luck! "The worth of a credit score (CS) is variable.  If you buy your stuff outright with 100% down then your CS is worthless. If you take a loan to buy stuff then it is worth exactly what you save in interest versus a poor score. But there is also the ""access"" benefit of CS where loans will no longer be available to you, forcing you to rent. If you consider rent as money down teh tiolet then this could factor in. The formula for CS worth is different for everyone. Bill Gates CS is worth zero to him. Walking away from a mortage is not the same as walking away from a loan.  A mortage has collateral. There are 2 objects: the money, and the house. If you walk away the bank gets the house as a fair trade. They keep all money you put against the house to boot! Sometimes the bank PROFITS when you walk away.  So in a good market you could consider walking away to be the Moral Michael thing to do. :)" well you are applying your own personal experience and saying it isn't worth it... at 40k debt that's an amount I believe most could swallow vs going to Europe AND to a specific degree that isn't recognized in the US. Yeah I agree... not really worth it... TO YOU.  I'm talking about the people out there with 100/200k in debt that could go for degrees that you can bring back to the US. Business, maths, even medicine. I'm not going to waste my time doing research for you but education in Germany, Sweden, Norway, Denmark (?) and Finland is free. All else being equal, you could probably go abroad and save yourself 40k to invest in whatever you want. But of course, owing thousands of dollars out of school is so ingrained in the US culture that it became the status quo.