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There’s a new movement in town and it goes by the name of debt freedom. It means being free from the burden of monthly repayments, interest rates, and looming debt collectors.

Sounds pretty great, right? Well, if being debt-free is the new rich, then what psychology lies behind it?

In this guide, we’ll break down the psychology of being debt-free and look at the pros and cons of debt-free living.

You’ll then be able to decide if this approach is best for you when it comes to prioritizing your financial goals.

a happy couple holding a document about being debt-free and new rich

Is being debt-free the new rich?

In many ways, being debt-free is the new rich. Without debt, you have more freedom and flexibility to spend your money on things that matter to you, such as travel, experiences, or a nest egg for retirement, as well as less stress. 

And having less stress leaves more time for you to focus on creating cash flow!

Major financial thought leaders such as Dave Ramsey and Robert Kiyosaki have always said that debt is the enemy. They believe that by eliminating debt and creating cash flow, you can achieve financial freedom faster and with less worry.

a woman with calculator and pen thinking about how to get debt-free and be the new rich

However, it’s important to note that being debt-free doesn’t necessarily mean you’re rich. Debt-free living can also lead to living “paycheck to paycheck” or “broke”. Being debt-free but broke means that you may have no savings and a limited financial safety net.

Therefore, it’s important to understand the psychology of being debt-free. Do you have other limiting beliefs that prevent you from living debt-free and becoming rich? Are you afraid of missing out on potential investment returns by not using leverage?

These are important questions to consider before making a decision on your financial path so that you can properly weigh the pros and cons of debt-free living.

Is it good to be completely debt-free?

It’s generally good to be debt free. This is especially true if you’re trying to improve your credit, save money on interest, or invest in yourself and your future. There are a few downsides to not carrying debt, but overall, it ensures financial stability and peace of mind in the long run.

However, being completely debt-free can be a perfectionist’s trap. Not all debt is bad and some forms of debt can actually be beneficial, such as a mortgage or student loan, as long as they are taken on strategically.

Most people take on debt without really taking the time to read through the terms or conditions of their loans. Another problem with having debt is that people don’t fully embrace the concept of compounding interest.

This means that if you’re carrying a high-interest debt, such as a credit card balance with an APR of 20%, then each month your interest expense will be added to the original amount owed, increasing the amount of debt you owe.

Related: What’s Next in Life After Your Mortgage is Paid Off?

Advantages of being debt-free

Here are some of the best reasons to go or maintain a debt-free status:

1. More cash flow

Instead of putting monthly or weekly payments towards debt, you can keep that money for yourself. This means more money in your pocket and more freedom to spend it however you wish.

This can help you to cover essentials in your life or can help to enhance the quality of your life. This money can be spent on experiences such as vacations, hobbies, or investments.

2. Your credit score will improve

When your debt is low, your credit score can improve. There are a few ways that your credit will improve when you have zero debt. 

One way is by keeping a low-utilization score. This means that the debt you do have is a smaller amount relative to your credit line limits.

Another way is by avoiding any late payments or defaults, which can’t even happen if you don’t carry debt.

3. You can invest in your future

Having debt-free money allows you to invest in yourself and your future. This can include anything from buying a new house to starting a business to putting money away for your retirement.

When you invest your money instead of paying off debt, you experience compound earnings. This means that your returns on investments can exponentially increase over time, often passively!

two women writing and calculating how they can be debt-free and be the new rich

4. You’re closer to financial independence

When debt is eliminated, you can focus on building wealth and becoming financially independent. This means being debt-free by 40 or earlier if possible!

You’ve achieved financial freedom when you’ve saved enough to cover your essential expenses for the rest of your life, allowing you to live debt-free and stress-free. 

This is also known as the FIRE movement, which stands for Financial Independence Retire Early.

Eliminating all debt is one of the first and most important steps in this process.

5. You’ll be able to give more

It’s hard to give to others when debt is looming over your head. When debt is gone, you are able to give more of your money or time to help others.

This could mean donating regularly to charities, helping out family and friends in need, or even starting a business that gives back in some way. It could even mean giving your time, which is just as valuable.

6. Financial organization will be simpler

It can be a real challenge to keep track of debt payments and debt amounts, especially when you have multiple debts. 

When debt is paid off, there are fewer bills to keep track of, making your life simpler and more organized.

You may also be interested in: 15 Incredible Debt Snowball Worksheets to Get Out of Debt 

7. You won’t stress about the small things as much

Debt can really weigh on a person’s mind, causing excessive stress and anxiety. It’s the number one cause of financial stress in the US.

When debt is gone, you don’t have to worry about it constantly, freeing up your mental energy for more meaningful and enjoyable activities. You can focus on the little things that make life enjoyable, like spending time with family or pursuing hobbies.

And if something goes awry in your financial situation, it won’t impact you as much if you don’t have debt holding you down.

Why being debt-free is bad

There are a few disadvantages of being debt-free that you may want to keep in mind as well:

1. You need to pay for everything upfront

As mentioned above, not breaking payments down into small chunks can lead to a lifestyle where you live from paycheck to paycheck. 

This can make it hard to have extra money that could be put into emergency savings, and can also decrease your quality of life if you need to constantly account for big purchases.

2. You miss out on debt rewards and debt protection

Debt can come with certain benefits such as debt forgiveness or debt consolidation, which help to make the debt more affordable. 

There are also great repayment options for people who work for certain types of employers, such as the government, religious organizations, or other non-profit institutions.

a woman in front of her laptop searching how to be debt-free and be the new rich

3. You won’t receive purchase protection from credit cards

One benefit of debt is that debt repayment is often protected by purchase protection from credit cards. That means if something you buy gets lost or damaged, you can usually be reimbursed for your loss.

But if you don’t purchase items on a credit card, you won’t have this protection. So, if there isn’t a warranty or insurance on the item, you’ll be left to pay out of pocket if something goes wrong.

4. You won’t build your credit score

Your debt-free lifestyle won’t help you build your credit score. Credit scores rely heavily on debt repayment and debt history, so debt must be taken on in order to build a good credit score.

This can be tricky for those who want to obtain large loans such as a mortgage or car loan later on in life. 

So it may be useful to at least open a credit card and make occasional purchases that you pay off in full, just to show that you’re responsible and timely when it comes to repayments.

Related: What is a Good Credit Score Range – and How to Get a Score In It?

5. You may miss out on zero-interest financing

Not all debt needs to be debt that carries high-interest rates. Sometimes debt is necessary to take advantage of zero-interest financing or other promotions on items such as appliances, furniture, and electronics.

For example, if you purchase an item and have a 6-month interest-free financing option, you can break your payments up into 6 installments and by the end of the term, you wouldn’t have paid any interest on the item.

This essentially means that your short-term debt was consequence free and cost you nothing.

6. You may miss tax deductions

Debt can come with certain tax deductions that debt-free individuals miss out on, especially if you have a business. 

If you have debt, you may be able to deduct some of the interest paid on that debt from your taxable income. This can result in thousands of dollars in extra money when filing taxes.

Does having debt keep you from being wealthy?

No, debt does not necessarily keep you from being wealthy. It is possible to pay off your debt over time while investing in your assets and building wealth. It all depends on how you manage your debt and how much debt you take on.

This is especially true with low-interest debt such as student loan debt. If you’re debt-free except for mortgage payments and student loans, it’s likely that your assets will appreciate faster than your debt accumulation.

Being in debt can keep you from being wealthy if you are not able to manage it and take on too much debt at once. High-interest debt will also hold you back from building wealth, so it’s important to pay that off as quickly as possible or avoid taking it on in the first place.

a woman pouring coffee that is debt-free and the new rich

Are people who are debt-free happier?

In general, debt-free people are happier, but this isn’t the only financial metric that affects happiness. While having no debt does make life easier, being able to have enough money saved up for financial emergencies will contribute significantly more to overall happiness.

Debt-free people also tend to be more mindful of their spending and focus on accumulating assets rather than liabilities, which can benefit them in the long run.

They set goals as well as limits that help to keep them away from financial pitfalls that could lead to more debt. Following this set of rules takes discipline and dedication but can quite literally pay off in the end.

Debt-free people are also often creative when it comes to making their money stretch further. They look for more cost-effective ways to purchase items and take advantage of promotions or discounts that help them save money in the process. 

This could look like purchasing items on clearance at the store or opting for free community events instead of expensive outings.

How does it feel to live without debt?

Living without debt can be freeing. The sense of freedom comes from the idea that you are in control of your own finances and no longer have to rely on creditors or lenders for money. Some other feelings being debt free can create include gratitude, contentedness, and peace of mind.

Being debt-free can also help you to think more clearly and come up with strategies for reaching financial goals such as retirement or travel. 

Since you’re not pressed or constantly made anxious by debt, you can use that extra energy to focus on other matters and set yourself up for financial success.

a retired couple that is debt-free and new rich

Is it better to build wealth or pay off debt?

The answer to this question depends on your specific life goals, but in general, paying off your debt will often be more beneficial in the long term. The amount of interest you accrue on debt can add up quickly, so it’s best to get rid of that before focusing on wealth building.

The main exception to this rule is if your wealth-building investment earns money at a higher rate than your debt is accumulating interest. For example, if you have a student loan with a 4% interest rate and an investment that has returns of 10%, you will outperform your loan and the investment is the better option.

However, it’s hard to avoid volatility and ensure that your investments will continue to earn at a high rate. This is why it’s a lower risk to pay off debt first and then focus on building wealth.

If you’re ready to start building wealth, try to find a way to speed up the debt payment process. This can look like increasing the amount you contribute to your monthly payments so you pay off the debt faster or picking up a side hustle to increase cash flow for the time being.

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