There’s an allure to living debt-free. It sounds like something that should appeal to everyone: You get to keep your hard-earned money and not be taken advantage of by greedy financial institutions looking to line their pockets at your expense. What’s not to like?

Though the idea seems nice and bright and shiny, from a practical perspective it’s not all nice and easy. Living debt-free is not always the best way to go. It can even cost you money.

The Idea of the No-Debt Lifestyle

Advocates of the no-debt lifestyle propose that you can live well — very well — without ever incurring debt. They claim you can go to college without using debt, buy a home without using debt, buy cars without ever using debt. Technically they are correct. These things can be done.

Whether you would want to is a very different question. Whether it is always the best financial decision is another question, and it has a clear answer. Living completely debt-free is not always the best financial decision. Sometimes, it’s just not realistic.

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A house is one of the largest financial assets most people will ever purchase. The alternative to owning is renting. We know there’s no free lunch, and apparently there’s no free room either. One way or another, we’re going to have to pay. 

Here we can quickly run into a problem of practicality with living debt-free. 

The median sales price of a home in the United States passed $374,000 earlier this year. 

Certainly you don’t have to start out with an average priced home; you could start out with an entry-level home. That might cost you around $100,000 in a low-cost area like Upstate New York. Or it might be pushing seven figures in the Bay area.

Not all areas in the United States have even low six-figure priced homes available. Saving a couple hundred grand to buy a home, for most people, rings of impracticality — and loudly so. 

Or you could rent. Rents are a function of real estate values; rents climb as real estate values climb.

This is one of the fundamental reasons it is financially advantageous, over the long term, to own your home. Once you own a home, the majority of the cost becomes fixed. That fixed portion, the mortgage, eventually goes away. A portion remains subject to inflationary pressure; your real estate taxes and your upkeep costs will rise across time. 

With rent, however, the entire amount is subject to inflationary pressure. And unlike a mortgage payment, it never stops. Rents go up forever. Across your lifetime, it would cost you far more to rent an equal place. 

Being mortgage-free sounds great. Living it, for most people, is not possible. 

The financially prudent option is to not buy more home than you need. Many people spend too much on their homes relative to their income — no matter how they pay for it.

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Education is another favorite target for the debt-free claim. You can go to school debt-free. It is possible. The question then becomes whether it is a good idea.

There are not many college degrees that are worth going six figures into debt over. Some degrees won’t help you support much debt at all. 

On average, a holder of a bachelor’s degree makes $32,000 more, per year, than a high school graduate. Over a career, the difference between having a bachelor’s degree and no college is over $1 million, on average. Individual results will vary. The degree and the school make a difference. 

Student debt, currently at $1.7 trillion, is certainly, on an overall basis, a problem. 

The average student borrower who graduated last year had $36,510 in student debt at the time of graduation; 30 percent of graduates, however, had no debt. 

Let’s stay with the ones with debt for a moment. On average, they took on $36,510 in debt. On average, they will make $32,000 more per year than if they hadn’t gone to college.

The math is not in favor of skipping college — not on average. 

You could postpone college to save up, or you could work through college and attend school part time. Those are definitely possibilities. Some people do those things and still incur debt.

What works best for you will depend on your situation. Should an engineering student delay graduating and starting a $65,000-per-year job, and instead go to school part-time to avoid $30K in debt? How many $65,000’s should they be willing to forgo to save that $30K? 

Some people can go to school debt-free. We know this for a fact; 30 percent graduate debt-free now. For those who didn’t choose wealthy parents, there are other options to go to school debt-free. But those options are not the best options in all cases.

We hear horror stories of graduates who are $100K in debt and working an entry-level job in fast food. That’s not a good situation. It occurs, but it is not the norm. And debt didn’t cause that situation. It makes it worse, but going to school debt-free wouldn’t have gotten them a better job. 

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Cost and Inconvenience

Sometimes it costs you money to live debt-free. 

If you live completely debt-free for a period of time, you will have poor credit. The exception is if you were always debt-free, then you are what is called a ghost — someone with an empty credit file. 

In many states, your car insurance rate is based on your credit. Drivers with lower credit scores are more likely to file claims. State governments often allow insurers to charge higher premiums for those with low credit scores. The increase can be significant. Perhaps even 20 percent or so significant. Over time, that can be a lot of money.

It is nearly impossible to rent a car without a major credit card. And it can be nearly impossible to rent one with a debit card. But then again, if you’re saving up to pay cash for a $700,000 house, you can’t really afford to travel anyway, so it might not be a problem. 

Living debt-free, especially for young people, requires frugality. For most of us, that does not equate to fun. Some people get a charge out of not paying for an expensive dinner; others enjoy the expensive dinner. You get to choose for you.

In either case, don’t use debt for the dinner. But living debt-free may hobble you from doing many other things, especially in your youth — as some of life’s biggest expenses occur early. 

Consumer Debt

Here is something worth striving to eliminate. There is rarely a good reason to incur revolving debt. There is rarely a good reason to incur debt for any consumer purchases. 

There is rarely a good reason to have a credit card issued by a store. They do that so you’ll buy more and pay them interest. Stores make a lot of money off credit cards; they don’t need some of yours as well.

Autos are — sometimes — the exception. I imagine I am hearing debt-free advocates screaming as I type.

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The idea of buying an inexpensive car and driving it until the wheels fall off is supposed to be the solution. But what if you need to be getting places, like work for example, and can’t afford to be sitting on the side of the road with a car with no wheels?

Not everyone is mechanically inclined. Not everyone can operate an older vehicle in a cost-effective manner. Buying an inexpensive car and running it into the ground is a good option for some people. But it is a horrific option for others. They can’t or don’t want to do their own maintenance. And repairs are not cheap.

If it’s good for you, that’s fine. But if it’s not, then it’s not. Sometimes a car loan is about reliability and personal safety. It’s hard to put a cost on those. 

The Bottom Line

Making good financial decisions is about being intentional with your money. You need to consider the options and evaluate the trade-offs. Sometimes it is better, for example, to rent. You might plan on living in an area for a year or so while you build some experience. Purchasing a home would generally be a bad idea in that case.

If, however, you’re going to live somewhere for 10 or 20 or 30 years, it will probably be advantageous to buy. And not everyone can save up enough to pay cash for a house, and it’s not usually a practical idea. 

Living debt-free makes it tough to do things like rent a car. And it can make car insurance more expensive. 

Ditching consumer debt, as soon as possible, is always a good idea. 

There are always niche ideas that work for a narrow range of people. Some people enjoy frugality. I find it painful, but that’s me. Niche ideas are not for everyone. 

To make good financial decisions about debt, we need to consider the pros and the cons on a case-by-case basis. Deciding that we will always take the zero-debt option means we will forgo opportunities that could have been advantageous for us.

We might not go to a good school, or get a good job, as quickly as we would have with a reasonable amount of debt. And we might never be able to save enough for a down payment on even a starter home in some places with resorting to extreme frugality. 

It’s easier to make a case for being debt-free as you get older. Once you have paid off your student loans and paid down your mortgage, you free up resources that you can more easily save up for car replacements and not have to buy something that the wheels might fall off. 

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