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Get out of debt to unleash your inner money maker

Our series on why you must get out of debt looked at how credit cards can double the price you pay, at the cost of foregone investments, and why mortgages are the only good debt.

But there’s another reason to get out of debt.

It’s hard to price, but it may be the most valuable benefit of all.

It’s the peace of mind and the freedom to make money that comes with being debt-free.

When you’ve no debts, you literally don’t owe anyone anything. Your money is yours to use as you will.

Sure, you may feel you owe:

  • Your parents for raising you
  • Your friends for the good times
  • A beer to anyone who helped you in the bad times
  • Whoever gave you that spare bed in my third debt article

But financially-speaking, you’re free.

Many people who get out of debt unfortunately use that freedom to go straight back into the mire. They fill the void left by paying off their debts with… more debt.

A better plan is to keep up the momentum to grow your net worth. Redirect your former debt repayments towards saving and investing. Use your new financial flexibility to increase your earnings.

You can start investing with a tiny budget – indeed it’s free with Freetrade.1

The important thing is to get your snowball rolling!

Make money for yourself, not some bank

I’ve heard many times from people how liberating getting out of debt is.

They discover what I relish every day – that my monthly income is going wherever I want it to go, not on paying for stuff bought and forgotten about years ago.

Debt-free, you can save up an emergency fund, invest to create a future income – or just treat yourself to a meal out or new pair of shoes, guilt-free.

And here’s the real bonus – when you’re financially secure, you’re also more likely to look for ways to make money.

Everyone knows the rich get richer. Having compound interest working for you instead of against you is a big reason why.

But I believe there’s also a mental pay-off for being debt-free.

Operating from a position of strength, you are more able to think of money as an opportunity and a tool, rather than as a burden. Your whole outlook on money and the language you use can change. And that’s the first step to getting richer.

My co-blogger The Accumulator had to get out from under his debts before he could begin amassing his passive hoard and planning for financial independence.

As someone who has never borrowed money and so started investing with a clean state, I find his journey inspiring.

But I’d choose my debt-free journey over it, any day.

What about my pal Bob / Aunt Bertha / Donald Trump?

Sure, we all know a few people who (seem to) handle their debts and still grow their income faster than their repayments.

I’m not saying debt is always a fatal disease. Rather, that it’s a hugely debilitating one, which can easily catch up and snuff out its victims.

How much wealthier would those income-rich, asset-poor debt jugglers be if instead of shuffling credit card payments, they put their brainpower into growing their investments or creating a passive income stream?

Mortgages: The exception to the rule

If you’ve got any non-mortgage debt – even if you think it’s balanced by assets – pay it off as soon as you can. In every way it’s worth it.

Using debt to buy a property is the only exception. A mortgage is cheap debt, and it enables you to live in your own home today rather than saving half your life to buy one, chasing rising house prices along the way.

Nowadays even I have a big interest-only mortgage, and I truly hate debt.

But do you want to know a secret?

I love my home and overall I’m happier for finally owning my own place.

But I believe I was a better investor when I didn’t have a mortgage hanging over me.

The bottom line on debt

For most Monevator readers, I’m preaching to the choir.

But too many average people have too much debt – and it’s in tough times like recessions that they discover why they shouldn’t.

It can be hard to get out of debt. You’ll have to go without.

But all that really matters in life is health, friends, family, love, and useful work or another purpose you enjoy.

Well, and beauty and truth, as the poet said.

(And personally I’d add Mexican food.)

Last I looked, getting into debt to buy an iPad when you can’t afford it just to have one before your friends wasn’t on a single philosopher’s list.

Series NavigationThe only good debt is dead debt
  1. Open an account via that link and we can both get a free share worth between £3 and £200. You’re growing your net worth already! []

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{ 53 comments… add one }
  • 47 Vanguardfan May 16, 2020, 10:32 am

    Yes I well remember the days of interest rate rises! I never had much of a mortgage in the current low interest rate environment, we had mortgages from early 1990s for about 20 years. I can understand if you have stretched to maximum borrowing on a 2% rate you have a lot more risk from small rises in interest rates. I recall rates of more like 8%, and I think the most we ever borrowed was no more than maybe three times our income (those were the days eh! Actually still possible in our area for a professional couple, but don’t bank on rising property values – they haven’t risen in real terms since the GFC). So we always had a comfortable safety margin.

  • 48 Richard May 16, 2020, 12:23 pm

    @TI – indeed that is the reason I took a fix. I have ‘lost’ these past few years though for sure.

    The biggest issue with rolling onto the svr is the svr are nearly always what I would call a rip off. Most look to be around 3.5%. To get onto a competitive tracker you need to apply and then you are back to needing a job etc. And these usually have end dates as well so you are sucked back into the cycle every few years, needing to maintain your income to keep the payments low…. So then you may as well take the longest fix you can (at todays rates)

  • 49 Xailter May 16, 2020, 2:00 pm

    Our mortgage came up for renewal last year and we went for a 5 year fix – at the time due to Brexit uncertainty. The 10 years were considered but were like an additional 1% which seemed a bit steep. I’m happy to pay for the certainty of those 5 years. 🙂

    It would seem if you’re worried about potentially re-mortgaging in the near future you need to get your LTV under 70% ASAP though, as I think Finumus noted in an article not too long ago.

  • 50 Charlie May 16, 2020, 7:36 pm

    ZXSpectrum48k wrote:
    “Looking at HSBC 60% LTV mortgages (as a reference benchmark)
    2y fixed = swap + 65bps, 5y fixed = swap + 100bps, 10y fixed = swap + 205 bps
    So the forward credit spreads are already quite steep (2y3y at 185bp and 5y5y at 300bp). It’s not clear to me why 2y fix + rolling into an SVR for 3y is going to be worse than a current 5y fix. In fact, the 10-year fix looks pretty expensive at that credit spread.”

    I’d love it if someone could unpick that a bit so that I could compare mortgages in this manner myself in future. Where do the 2y fixed = swap + 65bps parts come from? Looking at the HSBC rates use as example, I see them at 2y=1.49%, 3y=1.54y, 5y=1.59% and 10y=3.14% (10y is only available in “fee-saver” guise so I’ve quoted rates for same product flavours of other durations too). The deltas between the HSBC percentage rates don’t map simply to the “swap + n” rates given by ZX as far as I can see.

    Is it then a case of computing the forward rates via something like this method?
    https://www.investopedia.com/ask/answers/043015/how-do-i-convert-spot-rate-forward-rate.asp

    (Btw, is there a syntax cheatsheet for formatting comments? I’d have put that quotation in a blockquote or italicised it if I knew how…)

  • 51 TahiPanas2 May 17, 2020, 12:42 pm

    In my mid-20s I had a ghastly experience that changed my attitude to debt and spending for the rest of my life.
    3 years after graduation, I found myself working in Malaysia with, for me, a big overdraft.
    I was called into my local branch of Standard Chartered Bank and, without warning, told that my account was frozen until the overdraft was cleared. I left the bank shell-shocked, counting the loose change in my pocket and wondering how I would manage to buy fuel to get to work.
    It was a nightmare but taught me never ever to get in that situation again.
    TP2.

  • 52 Ball May 24, 2020, 6:12 pm

    One thing I can’t understand about this whole debate is why doesn’t everyone just look at the mortgage payment as the monthly living expense that it is. If you didn’t own a home, you would be paying rent, which means paying off your landlord’s mortgage instead (and then some). No one seems to suggesting paying rent months or years ahead of time, depriving yourself of money to spend or invest now. That would be silly. A mortgage is basically like paying rent to the bank anyway.

    Likewise, no one is suggesting paying other living expenses ahead of time. For instance, I don’t know anyone who stockpiles non perishable food on the basis that it will be cheaper than buying it as and when needed over the next 30 years.

  • 53 Carl May 24, 2020, 7:28 pm

    I have a big problem with your argument. For most people, it takes 25-30 years to pay off a mortgage, most of their working life. The benefits of investing in a tax sheltered account take years. The average rate of return from investing is higher than the rate on the mortgage debt. In theory, what you say is all good. In reality, retirees cannot eat, pay utility bills etc on the equity on their house, but they can from a diversified portfolio which has had years to even out the stock markets ups and downs and compound.

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