The ones who are living debt-free may seem like a rarity, but they aren't special or superhuman, nor are they necessarily wealthy. What distinguishes them from people who still have debt is their willingness to utilize the resources they have, financial or otherwise, to pay off debt or avoid it altogether.
Pros of Living Debt-Free
The price you pay for purchases is the actual price you pay. Since you don't have to waste your hard-earned money paying interest, you'll have more money to direct towards financial goals, travel plans or other purposes.
A good goal is to be debt-free by retirement age, either 65 or earlier if you want. If you have other goals, such as taking a sabbatical or starting a business, you should make sure that your debt isn't going to hold you back.
The psychology of being debt free is a fascinating and empowering topic that delves into how our relationship with money impacts our overall well-being and mental health. Being free from financial burdens can alleviate stress and anxiety and boost our self-esteem, confidence, and control over our lives.
Being debt-free is a financial milestone we often hear about people striving for. Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances.
Between mortgage loans, credit cards, student loans, and car loans, it's not uncommon for the typical American to have one or more types of debt. The ones who are living debt-free may seem like a rarity, but they aren't special or superhuman, nor are they necessarily wealthy.
Generally, it's smart to start funding your emergency savings before paying off debt. But once you have some money in an emergency fund, you may want to start paying down high-interest debt while continuing to fund your savings.
According to that same Experian study, less than 25% of American households are debt-free.
Less financial risk
If you are in debt without an emergency fund to fall back on, things can get dicey quite quickly if you suffer financial hardship or job loss. A life without debt gives your budget some wiggle room so that if things go awry, you have a safety net to fall back on that is not tied to debt payments.
A debt-free lifestyle can increase your financial security and means that you don't have to worry about debt hanging over you if the unexpected happens. Things like a sudden job loss, or unexpected medical issue are challenging in the best of circumstances.
Those between the ages of 40 and 49 hold an average of about $7,600 in credit card debt — the highest of any age bracket, per TransUnion data provided to CNBC Make It.
The average American debt totals $59,580, including mortgages, auto loans, student loans, and credit card debt. Debt peaks between ages 40 and 49, and the average amount varies widely across the country. If you're holding too much debt, consider a debt consolidation loan or seeing a credit counselor.
According to data on 78.2 million Credit Karma members, members of Generation X (ages 43 to 58) carry the highest average total debt — $61,036.
Now that we've defined debt-to-income ratio, let's figure out what yours means. Generally speaking, a good debt-to-income ratio is anything less than or equal to 36%. Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment.
Without any debts to worry about, your monthly expenses will drop, freeing up your personal cash flow and allowing you to focus on savings and daily living expenses. Few people understand just how free you can feel when you're no longer beholden to a slew of banks and lenders.
You've now broken free from difficult times in the past, and you're able to move forward with better habits and financial freedom. Feeling happier. More money in your pocket means you'll have to make fewer sacrifices and can worry less about debts hanging over you. Comfort.
Debt can be good or bad—and part of that depends on how it's used. Generally, debt used to help build wealth or improve a person's financial situation is considered good debt. Generally, financial obligations that are unaffordable or don't offer long-term benefits might be considered bad debt.
The United States has the world's highest national debt with $30.1 trillion owed to creditors as of the first quarter of 2023.
In terms of raw dollars, the country with the highest debt in the world is unquestionably the United States, whose national debt is more than twice that of any other country.
Former financial arbitrage trader Jerome Kerviel is the most indebted man on the planet, owing his former employer $6.3 billion. The amount Kerviel owes to French bank Societe Generale for fraudulent trades made in 2007 and 2008 would make Kerviel one of the 50 richest people in America if those debts were assets.
Key takeaways
If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
This compares annual payments to service all consumer debts—excluding mortgage payments—divided by your net income. This should be 20% or less of net income. A ratio of 15% or lower is healthy, and 20% or higher is considered a warning sign.