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Why Meeting Your Obligations Isnít Enough
by, 07-03-2009 at 08:58 PM (2005 Views)
A Life Without Debt: Why Meeting Your Obligations Isnít Enough
One of my friends became debt free about year ago. We were at lunch talking about how good it feels to be debt free, especially in the middle of a recession, when she uttered this gem: ďItís so great. I can pay all my bills and still have lots left over for fun stuff.Ē
I asked her how much she was allocating to savings and she said, ďNothing right now. We deprived ourselves so much to get the debt paid off that now weíre using the extra cash to treat ourselves to trips and things we missed out on. But donít worry, weíre able to meet all of our obligations and still remain debt free.Ē
I asked her if part of the reason for getting out of debt wasnít so she could save more.
ďSure. Someday. But being able to pay my bills is enough for now. I want to have fun.Ē
I sat there quietly choking on my sandwich while I pondered this mindset. Bear in mind that when my friend had debt, she lived by the mindset that if she could afford the minimum payment on something then she could really afford the item. We all know that this is the path to even more debt. When you only think in terms of meeting minimum payments, itís hard to get ahead because youíre not making much progress on paying anything down. Buy enough things using this mindset and the minimums alone can put you far behind and heaven help you if the interest rates rise or the note is called in. Somehow my friend got far enough past this thinking to get out of debt, but now sheís willing to settle for thinking that just meeting her obligations is enough.
I tried to explain that she needs to be using at least some of her extra cash to save for the future, but she wouldnít budge. She wants to make up for lost time in the fun department and, since sheís able to meet her obligations and have cash left over, she wants to spend the extra. Right up to the last penny. She kept telling me that sheíll save later, when sheís no longer young and carefree. Trying to explain that, ďyoungĒ was the best time to start saving was like hitting my head against a wall. She wouldnít listen and I got tired.
So let me explain here why being debt free should not be considered a license to spend all your newfound cash. When you first get out of debt, youíre likely to find that you have a lot more disposable income than youíre used to. With no credit card payments, car payments, or student loans, youíve freed up possibly thousands of dollars every month. And itís not surprising that you might want to spend some of that newfound wealth on something fun since youíve probably lived very close to the bone while paying down the debt. So go ahead, splurge a little and then settle down.
One of the big reasons for becoming debt free is so you can aggressively build wealth. With no payments, much of your extra cash can be saved and invested in vehicles that yield solid returns.
Itís great that you can now meet your monthly obligations and have some left over, but the left over (at least a large portion of it) should be put aside for things like retirement, college savings, new cars, home repairs, emergencies, and other short and long terms goals that you set. The more you save, the faster youíll accumulate the wealth that buys you true freedom to retire early, buy new cars with no payments, put your kids through school, give charitably, and do the things you really want to do. Thatís the benefit of being debt free: Freedom. But you can only reach it with savings.
In the case of my friend, sheís debt free now, but what happens when her car dies? Sheíll be right back in debt because she hasnít saved anything to buy another. The same will happen when the heat pump needs replacing, or the first medical emergency happens. With nothing saved, sheíll have to rely on credit cards or loans to handle these problems. In her case, being debt free will be a temporary state of existence.
Simply meeting your monthly obligations and then spending the rest isnít enough. Itís a great feeling to be able to pay all your bills, donít get me wrong, but thinking this way ensures that your time as a debt free person will be short. To truly achieve a permanent debt free existence you have to save some of your extra cash so that you donít have rely on credit to pull you though when things happen in life. Can you have some fun? Sure you can, within reason. There has to be a balance between having some fun now and creating a secure future for your family. This is the lesson I hope my friend learns before her time as a debt free person runs out.