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Join the more than 2 million families who've chosen K-12. Go to k12.com/podcast to learn more. That's k12.com/podcast. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less.

My name is Joshua. I'm your host. And on today's podcast, I want to continue our Financial Goals That Everybody Should Set series with goal number eight, which is be debt-free for life. I want to persuade you on today's podcast to set a goal to become debt-free and to stay debt-free for life.

If you are young or working with a young person, I want to try to persuade you to set a goal to teach the young person that you're working with to set a goal of how many times can I say set a goal to be debt-free and stay debt-free for life.

Now, let me begin with the reasons to consider this, and then I'll deal with some of the very many very valid objections to this approach. The basic reason to set a goal to be and stay debt-free for life is so that you never have to make decisions about your future based upon promises that you have made in the past.

When we think about what debt is, and in this context, let me define my meaning of the word debt. I'm specifically referring to when you enter into a contract to take money from someone or some entity of some kind and then to pay it back in the future upon some agreed upon terms.

That's what I mean. When you enter into that kind of contract, you are going to make a decision today about what you're going to do in the future with the information that you have today about the future. Now, since none of us are God, we can't see the future, the best we can do is make an intelligent, educated guess.

But if you talk to people, lots of people as I do and have, and you listen to them, one of the consistent themes that you find is that the guesses they made about their lives five years ago, 10 years ago, 20 years ago about what would be important to them today didn't turn out to be quite as accurate as they thought.

There are some people, a very small percentage, who seem to be pretty accurate, but most of us tend to change. And so when you're in debt, you owe people money, and your future decisions, the full range of decisions that you can make in the future is constricted because you have to follow through on promises you made in the past, you can find it very frustrating.

If you want to be happy in life, one good way to do that is to live in the present, and one good way to make sure that you can always live in the present and make whatever decisions you want to in the present about your future is to avoid debt.

That to me, I probably should jump up and down on my microphone and talk for another 30 minutes about this, but I'm just going to leave it there. I find that to be the fundamentally most important thing to understand. If your future is free and you can make any decision that seems right to you today, then you're going to feel good about life.

But if you've saddled yourself up with a bunch of past promises about what you're going to do in the future, it's very hard for you to feel so good about your life. There are other good reasons to avoid debt as well. I think an enormously valuable one is simply to maintain peace and eliminate pressure or stress from your life.

What happens is most of us, when we start borrowing money, we think that we're going to borrow money modestly, and some people do and stay there. But others of us, like I myself, wind up recognizing, "Hey, it's really great to have immediate gratification. This feels really good." And so we start borrowing money more heavily, and we borrow money more heavily, and we borrow money more heavily.

And all of a sudden, we're way in beyond where we ever intended to go. And now you're looking around and saying, "Oh, now what? Now what do I do?" And so you start to experience stress. You start to experience uncertainty. A man who doesn't have debt will pass through various trials in life, various tragedies, and because he hasn't made promises about his future, he can navigate.

A guy who doesn't know any money loses his job. Well, he can quickly change his circumstances and cut his expenses down to nothing using tools that we'll talk about later in the show, and he will be able to respond to that and go and find another one. He may wind up having to change his lifestyle drastically, but he can quickly pivot for that.

But if the same guy was saddled up with a mortgage or a couple of mortgages and car payments or a couple of car payments and student loan payments or a couple of student loan payments and credit card payments or a couple of credit card payments, then all of a sudden, it's pretty dire when he loses his job.

Maybe your spouse dies. Well, my wife dies and I have no debt, then I can adapt to the situation. I may have to move across the country and move close to mom and dad so they can help me with my children and get a simpler job that doesn't pay me so much money, but I can quickly adapt and adjust to the situation.

Whereas if I'm saddled up with all those payments, now it's much more difficult for me to respond to tragedy when tragedy strikes. When we think about what most of our goals are in life, very few of us set out to have a goal of being the richest man in the graveyard.

Very few of us believe that if I die with the most wealth, I win. The point of life is in the living, not in the accumulating. Accumulation can be a very wonderful and pleasurable part of life, but it's not the goal of life. And so by avoiding the alluring siren song of debt, you'll probably have more of the experience of life that you really want.

The peace, the opportunity, and the flexibility. Another huge benefit of self-consciously avoiding debt is that you will be more likely to avoid excess spending. One of the things I've experienced so many times is anytime that I have decided to borrow money to do something, my creative ability has been turned off.

I decided, well, I'm going to go to college. And in the beginning of my college experience, I worked my way through. Then I decided I'm working too hard, so I'm going to borrow money. Well, as soon as I realized that I could just sign my name on a paper, and after all, when I finish this college thing, I'm going to be making lots and lots of money because I'll have a college degree.

When I realized I can just sign my name on the paper and everything is easy, that's what I did. And my brain immediately stopped looking for other alternatives. Today, if I were coaching the younger Joshua, I would say, absolutely do not borrow money. Find a way to do this without borrowing money.

And I could today list a dozen ideas that are all vastly more creative that would have allowed me to achieve the same degree without ever borrowing money. I've experienced this with businesses. I've started businesses with credit cards. Okay, well, if I just borrow money on credit cards, then I'll have the money I need.

Yeah, it's true, and it can work. But by doing that, I never looked for more creative ways of getting the same benefit. Today, if I'm coaching a business owner, I would look for ways just simply to borrow money from customers rather than from banks by collecting payment up front for products and services that are going to be rendered later.

It's a much better model, and yet when money is borrowed easily, you stop looking for it. Even when tragedy strikes, for example, I've counseled a lot of people through times of great financial difficulty. If a guy hits a time of difficulty and he's got a big empty credit card or a set of them in his wallet, then the first thing he does is start swiping credit cards for the things that he and his family needs.

After all, his family needs groceries, so he goes and buys them with a credit card. His children need an education, so he keeps making their private school payments with a credit card. He needs a place to live, so he keeps going with a credit card. Now, what often happens is after six months of unemployment, he's continued to do that and he finds another job.

So after that six months of unemployment, he's left with $100,000 of credit card bills that then take the next four or five years to pay off. What this means in reality is that his time of unemployment has cost him five years of limited decisions. Now, contrast that with the guy who wasn't willing to go into debt, what would he have done?

Well, hopefully he would have thought ahead and prepared an emergency fund, but let's assume that he had no money and he was completely and totally broke. What would he have done? Well, on day one, he would have said, "We've got no money," so all spending stops. He would have pulled his children out of the private school.

They would not have gone and bought groceries. They would have gone to the food pantry instead, and he would have called up mom and dad and said, "Mom and dad, we lost our job. I've got no money whatsoever. Can my family and I, can we come and set up just a makeshift apartment in your garage because I can't afford the house payments and I got to get a tenant into the house this month in order to have a little money coming in?" I guess the guy in my story has a mortgage but is refusing to put money on credit cards.

So he does all these things, and it sucks. The children aren't sad to leave their friends. He's sad to move in with mom and dad. Everyone is sad about the situation, but they move into the garage apartment. The children get pulled out of school. Maybe they go to the local government school for a few months, or they start homeschooling part-time, and he's looking for a job.

He's very, very motivated to find a job, by the way, but let's assume it takes him still six months to find a job. Six months later, he's got a job. He calls up the tenant in the house and says, "Hey, listen, I know I gave you a one-year lease, but would you be willing to take $3,000 or $4,000 to break your lease and let me out of the lease early?" And six months later, his family is back in the house.

He enrolls the children back in the private school. They pick up with the relationships just like they were before, and everything, life picks up as normal. And so the whole time of crisis and frustration only lasts six months instead of five years. And the family is immediately restored back to their higher standard of living instead of having to make due while making a bunch of credit card payments for five years.

By being committed to being debt-free, he has shortened the overall cycle of the personal pain, even when going through a situation that most people would agree, "Hey, I would find no fault with you if you borrowed money to see yourself through this time." These are some of the important reasons to commit to being debt-free.

You'll experience a freedom of choice, which is ultimately the true freedom that we crave as humans. You'll experience more peace, less stress, which will help you to be happier and to live longer. And when you curb your consumption to the amount of money that you have, you will consume less.

And even if you're facing a difficult situation, you'll be better off in the long run. You'll keep your creative juices going. You'll be able to buy your things for cheaper. You'll be able to live for cheaper because you don't fall prey to the easy siren song of easy money.

Now, let's discuss the other side. Are there some things that you might give up if you were committed to being debt-free? Yes, and some of them might be important to you, so you should consider them carefully. I think in general, the first one that I want to hasten to acknowledge is that if you're making investments and you're buying things that can go up in value, and if you can do that with leverage, with debt, and if those investments do go up in value, then you'll have more money because of the leverage, as long as everything works out.

Years ago, when I was a big Dave Ramsey listener and I became convinced of the value of being debt-free, I would sit down with a spreadsheet and I would model what it would be like to accumulate a portfolio of real estate following the Dave Ramsey plan of paying cash for all of my houses as compared to financing them.

And again and again, I worked on that spreadsheet to try to make it show me that it would be better financially to buy the properties debt-free than with leverage. And again and again and again, the spreadsheet told me that if the properties go up in value and I can make my payments and everything works out, I'm always going to be richer with leverage.

And the same thing applies to any investment asset. If you can invest into a company and you can borrow on margin to buy more shares of the company, and if the company goes up in value or if the trade that you're making works out in your favor, you're always going to be better off with leverage.

If you can go to Las Vegas, if you go to Las Vegas with money that you borrow on a credit card and you gamble that money and your gambling pays off, you're going to be much richer because of the leverage of the credit card and the fact that you did it all with other people's money than with your own money.

So this should show you that obviously it all depends upon things going well. Now I wouldn't turn around then and say, well, but of course you can't ever depend on everything going well. There are many good responsible ways to use debt and use leverage in your favor. If you borrow money to buy a house to live in or to rent out, I'm not calling you stupid.

I think that usually will work out in your favor and most people probably should do that. I do think that you should still work to do it without a mortgage and you'll probably be happier with that decision, especially if you're younger and if you have time. But if you've got three or four children and you really need a bigger house and there's not an alternative way that makes sense for you right now, it can make a lot of sense then for you just to go ahead and get a mortgage and buy the house.

And then you would set the goal of becoming debt-free and staying debt-free for life. So I want to acknowledge here that when we're talking about this, we have to use different scales. We have to define whether our goal is to accumulate the maximum possible wealth in dollar terms or to live a maximally wealthy life.

And those two things are not the same. They don't even operate on the same scale. And I think that what I'm describing as the benefits of being debt-free, operate more closely to the scale that matters to us of living a wealthy life rather than being the wealthiest guy in the graveyard at the end when all the accounting is done.

There are other times when borrowing money can really be a good decision, especially for those who can see and are willing to take the cost of it. So the one that I've spent years thinking about is things like student loans. Student loans are very frustrating because anybody who can see that if you have to borrow a bunch of money to get access to a career that makes you a lot of money, and then you follow through on that plan, once you get started in that career that makes you a lot of money, the student loan plan can work out very well.

I think we see this all the time with people who are in famously expensive professions, law and medicine. And it does work out. I've worked with many people who go through college, wind up seven figures in debt with many, many years of med school debt, get out on the other side, and within a few years, they're earning seven figures a year, and it works out.

The problem here is what about all the people for whom it doesn't work out? I don't see this quite so much with physicians as I do with people like lawyers, but I've worked with many lawyers who, hey, here I am, I'm $130,000 in debt for whatever reason, and I don't like law anymore.

I hate this. I want to be free of it, but I can't. I have to keep working in a high income profession that I hate for years until I get my school loans paid down. Now, all the stuff that I said before still applies. I've been fascinated. I've spent years working on strategies of how can you get an expensive medical degree debt-free and how can you get a law degree debt-free.

And there are a handful of strategies that can work. They're not universally acceptable. Loans are pretty much universally available. But these other strategies, they exist and they can work for some people. So we go back to my idea of creativity that by avoiding debt, you kind of put yourself in the situation where you're going to be creative, and I think you're also going to be hardworking.

Imagine that you decided I'm not going to pay money. I'm not going to go into debt for law school. And imagine that you finished up your undergraduate degree, but you needed to save money for law school. And so you had to push it off for a few years. So you get a job in the legal industry and you spend several years working in the legal industry as an intern or as an assistant or as a paralegal or something that's relatively straightforward.

Yes, you're deferring your law school a little bit, but you're living on nothing and you're saving like crazy. Now, you're going to be much more confident when you go ahead and stroke that check for law school because you know what being a lawyer is actually like instead of just having a mirage in your head of what you think it's going to be like.

So while I can't make a straight argument and say that financially you're better off by being debt-free because I don't think that's true, I can confidently make the argument that you probably make much better life decisions and be happier with your status in life by being debt-free. So the next question would be, is there a way to split the difference?

Is there a way to have a little bit from each of these categories? Because you don't necessarily have to be committed to the extreme view to appreciate the value of it. There may be some ways to satisfy these things. Here is my personal litmus test for how you know when it might be acceptable for you to borrow money.

And I call it my missionary to deepest, darkest Peru example. I often imagine that one day I wake up and I wake up and there is an angel of God standing by my bed and he says, "Joshua, do not be afraid." And I say, "Okay, I'm a little afraid, but go ahead." And he says, "Joshua, one month from today, I want you to be on an airplane going to deepest, darkest Peru as a missionary.

And so I want you to resolve all of your affairs here at home so that you can be sitting on that airplane one month from today with no financial obligations and no debts whatsoever." So my question is, when going into a decision, could I do that? Would the decision that I'm making allow me to do that?

And this is, in many ways, my litmus test for basically the kind of debt which, while not ideal, is probably not going to cause somebody to feel like their entire future is mortgage, that their entire future is outside of their hands. I don't know that this is a healthy way to go down because sometimes those bright lines are better, but intellectual honestly compels me to discuss it.

Where this comes up a lot of times is in financial counseling. What people often want to do is not quit working, but they want to do is change their work, change their location, change their jobs. I've talked about many times on Radical Personal Finance. And so having this ability to pass my one-month test would solve it.

So let's go to the most commonly recommended pretty decent decision. Well, if I buy a house and I can put down, you know, 20% of the house in cash and I can get a long-term fixed-rate mortgage, probably even if I can't do it debt-free, that's probably going to turn out to be a pretty decent decision because in almost all circumstances, I should be able to satisfy the one-month test.

One month from today, most people who are engaging in conservative borrowing on a house are going to be able to sell the house within, you know, at some price the house will sell in a week or two, at some price the deal will close in a month or two, and that price is probably within the margin of money down to satisfy your mortgage and walk away.

So you could put the house up for sale, the house would sell, you would satisfy the mortgage and walk away. Even if you move to things like cars, again, following the 10% rule and other things I've talked about, I don't think you should buy expensive cars and have to put payments on them.

But if somebody has done that and they owe 50% of the value of the car, they could satisfy the one-month test. They could turn around and they could sell the car, sell it at 20% off to sell it today, and then take the money, pay off the car, and be done with it.

What fails that test every time are things like credit cards, because usually the things that you buy with credit cards are things that can't be sold in order to get you on the airplane debt-free one month from now. Student loans are the most difficult, because usually, once you go in, you usually don't have a lot of other assets to pay them off with.

So I'm generally always skeptical on student loans for those reasons. I don't think there's any reason, other than an extremely expensive degree, such as medical degree, advanced medical degree especially, I don't think there's any reason to ever resort to student loans. Similarly, business loans. Well, business loans for equipment and things like that could be sold, probably match that.

Business loans that are just needed for getting started, however, probably don't match that. So what would work out in that situation? Well, looking for investors rather than lenders. If you take investors in your business, you need to shut down a business, that would free you from that long-term obligation, because you would just satisfy the investors with whatever the business assets are, rather than lenders, especially avoiding personal guarantees on business loans.

So I hope you see the point. By committing yourself to a goal of being debt-free for life, you set yourself up with the most free kind of lifestyle that you can imagine, where you can make any choice that is available to you, any choice that you want to make, because you haven't pledged your future with your past decisions.

So that's the healthiest point. But if, in your circumstances, you don't feel like that's the right move, at least keep that basic concept in mind of the one-month test. Don't say, "Hey, let's all go on vacation this year, and let's borrow $20,000 that I'm going to pay off on credit cards over the next two years." That would fail the one-month test.

If you need to buy a house, think about the one-month test. And if you could be on an airplane a month from now, then you retain the basic elements of that freedom of choice that you're looking for, while also recognizing that we live in a very financial and debt-heavy world.

I acknowledge, for honesty's sake, that there are some outliers who have become very wealthy by using other people's money. I observe, though, that even if they had made the commitment to be debt-free, I don't think they would be less rich. I think they would have chosen a different, more creative source of financing, rather than just going out and borrowing a bunch of money.

And that's why I introduced my one-month test, because there's many ways of finding leverage that's not just straight-up financial leverage. I'm going to go and put this on a credit card. So I acknowledge that they're out there, and I acknowledge that we have these different scales. For the vast majority of us, however, I just can't think of many good things that come from debt.

The examples that usually I would say, "Okay, that's a good thing," is, "Well, my parents were getting older, and my family wanted to live close to them, and they live in Staten Island, and so I needed to borrow a good amount of money on a mortgage to be able to afford a house.

I just didn't have the cash to pay for it. And so we went ahead and bought the house using a mortgage, and that way we were able to be close to my parents for the five years before their death, so that they could be with their grandchildren." That's totally reasonable, totally understandable.

I'm not saying you made a dumb decision in any way, and I'm not saying that financially that actually won't work out to be the best decision for you. What I am saying is that probably wasn't the only way. There were probably a number of other ways that you could have accomplished those same goals that you had of spending time with your parents, and you wouldn't have had to resort to debt.

So, given the number of times that I have been burned by my own borrowing, and given the huge, huge numbers of people who have made just consistently dumb decisions due to easy money borrowing, I think we're far better off by just drawing a line in the sand and say, "I'm going to live debt-free for life." Then, after making that decision, let's look at all those things where it really seems like debt is useful, and let's build new alternative models that don't come with the downside.

This is what I am teaching and going to encourage my children. Don't ever borrow money, ever, for any reason, because I believe that that will make the best world for my children, my grandchildren, and my great-grandchildren. And then, by making that decision, it inspires me to say, "How can I equip you so that you can actually follow through on this?

How can we plan ahead as a family so that we can fulfill this commitment for your good?" I'll talk more about this in the next episode, but we don't have to accept the world of constant and never-ending consumer debt that our parents and grandparents built for us. I think they were cheated.

I think there's kind of a scam about Wall Street basically preying on poor people. It's not my number one priority, but we don't have to accept that. We can build a better world for our children and for our grandchildren to help them to get the good things that they need, understand and deal realistically with the world that we live in, but avoid the negative things that come with a heavily indebted consumer culture.

And that's why I think everybody should set a goal of becoming debt-free for life.