A lot of our personal finance blog series is about debt and, in particular, how to become debt-free. This is essentially a reflection of our debt-free journey and the highs and lows experienced in the process. This has led me to high consumption of debt-free stories on blogs, youtube and podcasts.
This brings me to an observation about many of these “debt-free” journeys – they aren’t debt-free! It all started fine about how they had $X 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 purchased, and the great interest rate secured. Ummm … one of 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 party due to past events.
I know it’s 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 debt will generate a more significant income when compared to the costs of that debt, you will come out ahead; or you should.
But this isn’t where most debt goes. As noted 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
Future economic benefits are the future wages or salary you have yet to earn. And when you borrow the money, you are operating on the assumption; you will earn this money in the future. This is an explicit action to prevent your future self from enjoying that money because you currently want that stuff.
To a Third Party
Someone else is getting your money. You have made a promise to give someone else your future money—the money you haven’t earned and haven’t received. As I write this, many people who not long ago held the reasonable assumption their future economic benefits, i.e. 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 about credit cards? And the new car lease? How about that business loan?
Of course, this leads us straight into the debate of good debt v bad debt. That will be for another article, as it’s a hotly contested point 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 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 many 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.