What Debt Free Looks Like

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What Debt Free Looks Like

Living debt-free is old fashioned, some say. And they’re probably right.

So I guess I’m old fashioned.

But I only got old fashioned after I had hit the wall financially, some ten years ago, and realized that the lifestyle I was leading had nothing to do with my financial reality. It was based on the common expectations of the American Dream.

I didn’t buy into the American Dream until I moved back to the U.S. at age 40. And by age 53, I had blown that dream out of the water. By then, I had bought multiple properties with mortgages, refinanced to pull money out of the built-up equity, and racked up car debt, personal credit card debt and business credit-line debt. I was “full in.”

Until I was out. And lost everything.

Today, as I work with women on them reaching that wondrous place called “financial peace of mind,” the first thing that has to be addressed is debt levels … and the kinds of debt they are carrying.

Not that there’s really “good debt” and “bad debt” as there used to be. However, there may be some “necessary debt,” such as a mortgage with a favorable interest rate or a college loan to round out college expenses (versus carrying the entire cost of college).

To see where you might stand compared to others in the country, here are some nationwide income and debt figures:

• According to the Census Bureau, in 2011 the median family household income (meaning half were higher and half were lower) was $62,273.

• The average American household holds $15,956 in credit card debt, according to Creditcards.com, one of the websites that track the credit card industry.

• Sixty percent of Americans own their homes and most still hold mortgages with banks. In 2011, the national average for a new home loan was $222,261 with a $1,061 average monthly payment for a 30-year mortgage at 4 percent, according to LendingTree.

• Most Americans borrow money to buy a car or lease one over time. According to the Federal Reserve, the average amount financed for a new car was $26,673. Edmunds.com, the auto website, says that in 2010, 21.8 percent of Americans who bought a new car still had an average of $3,789 in negative equity on their trade-in.

• The Project on Student Debt says the average graduate of a four-year nonprofit university carries more than $25,000 in loans at the time of graduation.

All told, the majority of Americans are in one type of debt or another. In fact, one source claims that around 80 percent Americans carry debt if we count secured debts like homes and cars. Without homes and cars, that number drops to about 50 percent of the adult population.

However you define “debt-free,” how do those people get to that state of grace? Well, here’s what I learned … and what I teach and follow today.

• Being debt-free is not related to income. Instead, it’s related to hard work and making sensible decisions.

• It requires making a conscious decision to be debt free, and sticking to it.

• It calls for a spending plan (call it a budget, if you like) and things not on that plan are simply not purchased. No excuses. But that doesn’t mean “fun” isn’t budgeted for …

• Budgets have to include some room for the unexpected, because no one can foresee everything that can happen.

• Home equity is not touched. It’s sacred. It’s not a “what if” bank account.

• Everything’s game when it comes to earning some extra money or saving some money: that means being creative about odd jobs and extra jobs, as well as cutting spending in unusual (even quirky) ways.

• Cars are kept longer and may even be bought when they’re a year or two old (and have already taken the first hit of depreciation).

• Forget about what “they” might think; “they” are not going to pay your mortgage or your medical bills when you get old.

Most of all, “personal responsibility” is the mantra of the debt free: we’re all where we are because of the decisions we’ve made up until now. Those who are debt free do not live in rarefied air somewhere. We all live under the same government and in the same lousy economy. (As Seth Godin says, quoting is friend Melissa, “Just because the tide is out, doesn’t mean there is less water in the ocean.”)

The difference is having real clear priorities when it comes to making decisions on how to spend, often giving preference to long-term security over instant gratification. (Just remember, instant gratification doesn’t last long …)

As for whether or not you can still get debt-free, Ayn Rand probably said it best: “Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

So, is it time to get in the driver’s seat yet?

Be sure to let us know in the Comments section below what your greatest challenges are to getting debt free.


Bio: Sharon O’Day lost everything at age 53: her home, her business, everything. But how could that be? She’s an expert in global finance and marketing with an MBA from the Wharton School. She has worked with governments, corporations, and individuals … yes, she was the secret “weapon,” if you will, behind many individuals in high places. Yet she did! Since then, with her finances completely turned around, Sharon has gone on to interview countless women. She’s done extensive research to understand how that could have happened, especially with her strong knowledge of numbers and finance.

The surprising answers are shared in her posts, articles and an upcoming book. Today her mission is to show as many women as possible how to become financially free for the long term, through her coaching programs. She has developed a step-by-step plan to get past all the obstacles that keep women broke and scared … and from reaching the financial peace of mind they so deserve … if they’re willing to do what it takes!

  • Lisbeth Tanz

    I love this post, Sharon! It’s a bit mind-boggling to see how many people in the U.S. are in debt, whether “good” or not. When did it become OK to carry debt? I don’t remember this being an issue in my parent’s time – but my generation (end of the Baby Boomers) seems to have embraced the concept fully. It is because goods and services are too expensive to afford without credit? Is it that we set our sights higher than we should because we can, if we have the right credit line? While I haven’t made the right choices in the past and am now paying for it (literally), I’m thrilled that my son seems to have developed a “frugal” gene and a complete disdain for debt. Not sure where he got that, but I’m thrilled he has it. He’s a great role model for me. I don’t know too many parents who would say that about their kids. 🙂

    • Lis, I think the concept of “good debt” started gaining momentum when all the young GIs came home from the war and the government used new homes, refrigerators, furniture, etc., to drive the post-War economy. So, with the exception of high interest rate moments (like during the Carter administration), mortgages were considered a good way to leverage your income … as long as properties continued to increase in value. But here was my take late last year: http://sharonoday.com/talking-about-debt/ BTW, congratulations on raising a fiscally conservative son! 😉

  • Catherine

    Great post Sharon! THis is my goal! My biggest challenge is the income fluctuations I have to deal with. Just when I think I have some money put away, I have to access it for the months my income dips. My goal is of course, to get my expenses as low as possible, and then to start anticipating the ups and downs better so I can start putting other things in place that create more cash flow during the slower times. Thank you for your always insightful articles.

    • Fluctuations in cash flow are the bane of our existence as entrepreneurs, Cat, especially in the early stages of our businesses. One thing is to try to find some small repetitive activities (and maybe passive? like subscriptions?) that bring a steady monthly flow, so you take some of the sting out of slower months. And if they can cover you basic-basic nut, even better!

  • Sondra

    Well stamp “old-fashioned” across my chest and let me wear it like a badge of honor. My days of looking at a credit card statement and wondering, “What in the world did I buy?” are OVER!!! Thanks Sharon!!!

    • And doesn’t it feel great, Sondra? I just wish more of our fellow ‘amazing women’ could say the same thing!

  • It’s difficult but it can be done. Like most, I’m working on it…2 credit cards left/paid 5 in full and do not use. Xx

    • That’s great that you’ve gotten five cards out of circulation, Carmen! Just do hang on to them. As you probably know, the available credit on them counts positively towards your credit score by keeping your used/unused ratio of available credit low.

  • Carly Alyssa Thorne

    It is very empowering for others to hear the Yes I did and SO can You… Good posts always…

    • Carly, it’s the veritable “mess to message” situation where what triggered everything was getting through something important and wanting to share it …

  • In times of overconsumption, we need to be very careful not to overdo it with the expenses. And yes, it’s great being debt-free!

    • You’re right, Tereza … credit looks like “easy money” until it comes time to pay it back! Yet, as you say, being out of debt feels so good it’s worth the effort for people to get back there.

  • Personal responsibility…love that…that is such an important part of living life, isn’t it? Great post, Sharon and I like how you say “spending plan” instead of budget, that sounds so much better!

    • Sherie, the concept of personal responsibility touches every aspect of our lives. It’s a hard lesson to learn if it wasn’t part of our growing up … but worth every bit of effort because of how easy it makes decision-making. (Including with money.)

  • I am so looking forward to the day when I am debt-free. My relationship with money has always been a rocky one but it’s getting better every day. Great post, as usual Sharon!

    • Hope these articles are helping a bit, Lena. What’s important is that you already realize that you DO have a relationship with money … and that means you can change it. Most people don’t ever give it that much thought. To them, money “just is.” As if they have no influence over it …

  • Oh boy. My student loan debt is nearing 100k, and its not over yet. Fortunately there are ways to repay the debit in my chosen profession, when the education piece of the pie is accomplished. Super kudos to you for turning your experiences into a passion for help others!

    • CSB, that amount of debt sounds heavy but I’m glad you’ve thought through your profession’s ability to generate the income to pay it back. It took me time to pay off my Wharton MBA loans, but was worth it because that degree has made such a difference as a door-opener throughout my career. Sounds like yours will, too.

  • Jamie

    I’m fortunate that I learned this lesson early on. I’m still digging myself out of that debt, but I’m getting closer and closer. I understand that sometimes you need the debt to get to where you want (cars, homes, etc) but there’s no need for the credit card debt I had created in college. Slowly working that off, and every day I grow a step closer!

    • Jamie, you’re right, it’s the credit card debt that becomes such a weight around our necks, especially when any glitches at all can skyrocket the interest rates. And to start with that debt while still in school is even tougher. Congratulations on getting on top of it early. Be sure to celebrate when you get to “debt free!”

  • Those are shocking statistics about the amount of debt the average person is in! I can relate to your losing everything Sharon and have been there myself. One of the best things to get out of it was that I learnt not to buy anything that I couldn’t afford. Sounds obvious but I resolved not to take on any loan eg to buy a car that I wasn’t sure I could repay. For small items, I save before I buy!

    • “Saving before buying” used to be how we all lived, Carolyn. And it’s the healthiest way to live today. It’s just that most of the population has “un-learned” that habit and is now struggling with the consequences. Bet you’re as glad as I am that we’ve already learned our lesson … 😉

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  • I always love reading your posts, Sharon – not only do you cover very important topics, but you do it with a touch of humor and leave the reader believing it’s doable! Thanks for another great one!

    • Money may be important, but who said we can’t inject a little humor around it, right Lisa? Life’s too short! 😉

  • Cathy Taughinbaugh

    Wonderful post, Sharon. It is challenging at times to remain debt free, but we can do it if we focus and make it a priority. Thanks for all the great tips. It is a much needed reminder.

    • Like anything else, Cathy, if we can get our priorities straight (including remaining debt free), everything else seems to fall into place so much more easily, doesn’t it?

  • The world system is all mixed up! When did it become OK to be in debt? I have to admit I did fall somewhat a little bit in that trap and am now almost out of it… NEVER to happen again. I’ve lived both ways and I prefer debt-free! Great article!

  • Leanne

    I am barely hanging on and don’t know which way to turn. I have a mortgage under water and my lender has refused to help me in any way (twice) as I’m still making the outrageous monthy payments. I work for the State of Wisconsin and no thanks to Governor Walker, my paycheck has shrunk by $200/month and it’s going to get worse as I just discovered that the meds I must take to stay alive are increasing in cost dramatically in January 2013. I hesitate to let my house go into foreclosure as I have two dogs one of which is on “the list” so no one would rent to me, never mind the negative hit I’ll take to my credit score if I default on the mortgage. I have one maxed out credit card and no other debt but my mortgage, but also no savings. I don’t have internet or cable tv, never eat out and don’t spend money for any extras, it’s all I can do to scrape up money for dog food and groceries. I don’t know what to do. Perhaps this isn’t the place to tell all, but as this is a site for women and finance I thought I might get some ideas.

  • Josh

    Enjoyed your post. Thank you. My wife and I just became debt free this month. No credit cards or car loans or mortgages or anything. Literally, no debt. It took us a long time (about 5 years) and hasn’t been easy but now feels like the struggle was totally worth it… especially for our three kids who sacrificed right along with us. The biggest challenge was giving up “things” which included a lot of downsizing and getting over how we felt with friends, etc. At some point, we just stopped explaining why we rent a tiny home, only drive one car, never eat out, and all of that. Not because we were ashamed but just the opposite. We knew we were doing the right thing and just stopped caring what anybody else thought. For those of you with more debt than you can handle please understand that you are in control of it all and life is short. Give up your house, your car, whatever. Get a second job. Spend less money. You’ll see… it’s worth it. And, surprisingly, you’ll be better off in five years then you will be if you don’t do something now. And, yes, it will probably take at least that long so just accept it. Good luck.

    • It DOES feel fabulous, doesn’t it, Josh? When I did my major downsizing 10-12 years ago, I lost some “friends.” Guess they really weren’t! They couldn’t deal with the extreme I went to. My rules: affordable and safe. The day I woke up and realized no one else was going to pay my mortgage or pay my bills in retirement, I let go of “they.” I bet you too have difficulty describing the feeling of being debt- and stress-free. Bravo!