A lot of our personal finance blog series is about debt and in particular how to become debt free. This is in large part a reflection of our debt free journey and the highs and lows experienced in that process. This has led me onto being a rather high consumer of debt free stories on blogs, youtube and podcasts.
Which brings me to an observation about a lot of these “debt free” journeys – they aren’t debt free! It all starts off fine about how they had $X amount of credit cards, car loans and student loans and battled their way through it. And yes, it is a slog. But more about this in another article perhaps.
And then in the next breath they tell us about the new home they just purchased and what a great interest rate they secured. Ummm … one us has a definitional problem about what debt free means.
Debt Free Definition
Ok, with the accounting hat on the definition for debt, or in accounting speak a liability, would be along the lines of:
An obligation that will require the transfer of future economic benefits to a third part as a result of past events.
I know its not quite what most people would use as their working model in defining debt, but takes a look at this for a moment … those accountants might be onto something that the rest of us can learn something from. It’s not all debits and credits!
You are committing your future-self to do something. In this case you are committing future wages or earnings to pay for something. This is not the best way to building wealth. I know, if that thing you are buying now with that debt will generate a greater income when compared to the costs of that debt you will come out ahead … or should.
But this isn’t where most debt goes. As noted in by M. Szmigiera back in 2019, most debt held in the US, for example, is not for investment purposes but rather consumption and lifestyle growth.
Future Economic Benefits
This is the wages or salary that has yet to be earned, and the assumption it will be earned and received, that you are preventing your future-self to not benefit from. Your current-self is receiving those benefits now.
To a Third Party
Someone else is getting your money. You have made a promise to give someone else your future money. Money you haven’t earned and haven’t received. As I write this there are a lot of people who not long ago held the reasonable assumption their future economic benefits, ie earnings from their job, would continue. This assumption for many is looking less and less stable as our current economic problems unfold.
As a Result of Past Events
This phrase emphasizes what we have already touched on; that is you have already started to receive the benefits of this transaction and these benefits have created an obligation for you going into the future.
Those Debt Free Stories
Now back to these stories we read about or watch. What do they think the home loan is? What do they think those credit cards are? What do they think the new car lease is? What do they think that business loan is?
Of course this leads us straight into the debate of good debt v bad debt. That too will be for another article as its a point that is hotly contested in the personal finance niche. To me this often looks like a debate between many followers of Robert Kiyosaki and Dave Ramsey. No surprised I do tend to fall into the Dave crowd … but Robert’s views have also been very influential and in fact they are looking at the very same issues but just from different angles.
But as referenced above most of the debt people take on is not for what Robert talks about. It’s there for lifestyle growth … which is a fancy way of saying “paying for things they can’t afford now”.
Am I way off the mark in the irritation these debt free stories sometimes cause me? Probably. Agreed, there are much more important things in life to take one’s attention. However, when we are claiming to have achieved something let us be very clear in what we have in fact achieved.