Friday, February 03, 2006

Defining "Debt Free"

A twenty-something coworker asked me an interesting question yesterday:

"If you had a friend who you know had lots of debt not long ago," he said, "and now all of a sudden he's telling everyone he's debt-free, what would you think?"

The question gave me pause. In situations like this, my skeptical side kicks in almost instantly. I've seen human nature in all its glory too many times — people will do and say pretty much anything to forward whatever motives they may have at the time. Half-truths and outright fibs often take center stage when there's a social position to uphold. Or gain.

Here's the situation: My coworker's friend is looking to gain converts to a new undertaking. He's working for Primerica financial services, and as is typical with most multilevel marketing setups, he needs to get people "under him" to make all the money that he can. In order to tote his friends and family along for the Primerica ride, he has to make it sound as if his new biz is the best thing that's ever happened to him. That's the only way they'll get interested, and perhaps want to join in.

(If you're new to the Primerica story, just Google that term — or try "Primerica experience." You'll find lots and lots of first- and third-hand accounts of the business. Expect fervent opinions from both sides of the story.)

Primerica may indeed be the best thing to ever happen to Debt-Free Friend. Honestly, I haven't seen the guy's balance sheet, so all I can go on is whatever evidence my coworker gives me. Which, of course, might as well be categorized as heresay.

I told my coworker that "debt free" isn't necessarily a cut-and-dried term. It can mean different things to different people. It can be twisted around like Play-Doh.

For instance, suppose a family has $20k in credit-card debt and $15k in auto loans. They have some equity in their home, though, so they refinance their home to get cash out. They then use that cash to pay off their credit cards and auto loans. Are they now "debt-free except for their mortgage?" Technically, sure. But their net worth is still the same as it was before the refinance. They didn't pay off that debt.

"It's still there," as Dave Ramsey would say. "They just moved it."

Or take that same family. Suppose the refi didn't happen. But what did happen was that rich Uncle Bill passed away. And in his will, Bill left the family $40,000 as a final "See ya!" They used this cash to pay off their credit cards and car loans. Good for them, right? Again, they're now "debt-free except for their mortgage." Undoubtedly, their net worth has improved. But what got them there? Hard work? Or pure unadulterated luck?

I strongly believe that there is a difference, particularly in matters of money.

Why? Because neither of these two methods of attaining debt-freedom do anything to combat the original cause of the debt: Our family spends more than it makes. Cash-out refis, last-testament gifts from rich uncles, and even moderate pay raises only serve as Band-Aids on a small-scale family's large-scale financial illness. Folks consider these things "cures" for their money woes, but in reality they're treating only the symptoms. The actual "money disease" of overspending is left unchecked. And we know how that usually ends up.

Contrast this with someone who racks up decent debt, then at some point figures out "how the world works" and sees the error in his ways. He takes serious stock of his finances, and begins planning his income and outgo to take as much advantage of his money as he can. He takes steps to educate himself about finances. He figures out his money weaknesses, and he works to eliminate (or at least minimize) them. Most importantly, he works hard, over time, to reduce his debt and stress, and he genuinely improves his financial picture — to a marked degree — entirely through his own efforts.

Chances are that this person will remember where he came from. His mindset and his actions will likely dictate that he'll not be in that place again.

Until this past December, when I talked about being "debt-free except for my house," it was genuine. The debt I had, I paid off. It took years. It took work. Heck, it even took building a website, right?

And I didn't roll any other debt into my mortgage along the way. I didn't win any Family Tree Lottery and use the proceeds to erase past transgressions. I immensely valued that debt freedom, and I'm impatient as heck to get back there; i.e., I can't wait to get my new car paid off. (It's a sweet ride, for sure. But when I see it, about all I can think of is "payment.")

In the end, the point I tried to get across to my young coworker was that the term "debt free, except for ..." is as open to ambiguity as anything else. And since most folks won't whip out their Quicken or Money desktops to show you where they really stand, it's all mostly a judgement call. You play the story against the evidence, and see who wins out.

But that's how it is with money and motives. Let's face it: There are a lot of Networth IQ profiles that I just don't trust.


— Posted by Michael @ 8:28 AM


Have you read Empire of Debt? It's a book about debt that may be of interest to you.

The worst thing about debt is that it takes away your freedoms.


I do have to give Primerica credit for leading me down the "debt free" path. Hubby set some Primearica accounts 10 years ago. When I took over the finances I wanted to know where our $250 was going. When I found out( poor preformance and HIGH fees), I got it out of there ASAP. Without Primerica I would still be ignorant of investing.



I've not read that book, nor heard about it. But I'm off to Amazon to check it out, for sure.



Did your Primerica agent help you with budgeting and financial planning of that (basic) sort?

I know the fees of their products have to be high, relative to others, simply because the agents' commissions have to come from somewhere. And I certainly don't doubt the poor performance.


Our agent was a nice guy. You still got the "baffle them withbull s**t" vibe from him. He handed us a foot high pile of charts and said get back to me if you want to invest. He did run a needs analysis of how much we would need to retire on. Just showed us chart after chart after chart. The savings plan he set us up on would NOT have gotten us to where we wanted to be in 45 years.-A fact I discovered after learning the terms of the trade. Seriously, "investing for dummies " was too complicated for me. After canceling the account, I used the needs analysis as a basis from which to start learning. I do remember him introducing the fact of investing your raises instead of letting it be absorbed into everyday living. He also brought up TERM life insurance(he sold that too of course). My family had always used Whole life. Although he told us it was bad, I had to find out on my own why. I can't find most of the other paperwork, but I have the account closing paperwork that consisted of a 4.5% backend load & a yearly $20.00 service fee($30 if not active) I closed it 5 years ago.
This is why I love the personal finance blogs. I can see it helping sooo many people who are intimadated. Thanks for all you do.


Interesting post. For me there's no ambiguity. "Debt free" means free of debt. As in you don't have any. "Debt free except ..." means you owe someone, and as such, you're not debt free. A mortgage is a debt just like any other debt.


Debt is a debt and if some says about debt free,I am sorry to say that he is wrong.Now even Governments are are running on deficit financing and public debt.Mortgage apparently may not sound as a debt but it is and it will be.Unless planned it will hook you up.


I am trying to pay off everthing as well. No debt is the goal. Check out my progress


I started my financial career with Primerica (I was trained by them), but I soon left, because I felt there were better options elsewhere.

Yes, Primerica does help people out of debt, but is their product really the best for a client? Is 'Buy term and invest the difference.' really the best solution? Does it truly offer the best value over the long term?

In my opinion, there are far better options elsewhere - for both agents and clients. Yes, Primerica does help people out of debt, and I commend them for that - but when it comes to looking for what is best for my client, I have to say that I can generally get better value elsewhere.

This raises the question; Should we be loyal to a client first and then a company or the other way round. As far as I am concerned the client has to come first.

** Comments Closed on this Post **

Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof).

My financial life began turning around when I took responsibility for it.
— Dave Ramsey


Start (2005-12): ~$21,900
Currently: $0
[About Our Debt Paydown]


Savings Goal: $15,000
Currently: ~$15,115
[About Our Liquid Savings Goal]