Let’s DEFINE Debt Free

by bigcajunman on September 18, 2012

Given the relative success of my Let’s Define Retirement post, I figured I’d take another swing at a term that I hear a lot these days, and that is Debt Free.

When I use the term Debt Free, I really mean, no debts, owing no one any money (or owing anyone no money, if you prefer). There must be ground zero and this is it:

Definition: if you owe any money you have debts, if you owe no one any money, you are debt free, simple isn’t it?

I do not subscribe to the Good Debt, Bad Debt hokum, remember I have said All Debt is Bad more than once. The concept of Good Debt was created by Banks and those who wish to lend you money, so you don’t feel bad (it’s like Ice Cream companies saying that there is Good Obese and Bad Obese).

I felt that maybe I didn’t understand what Debt actually meant, but I looked at Dictionary.com and found Debt defined as:

something that is owed or that one is bound to pay to or perform for another: a debt of $50.

There are other definitions there and I invite you to look it up in your dictionaries, but in my mind that is Debt, well-defined.

From this Debt Free must mean owing nothing or not bound to pay or perform for another: a debt of $0.

I have heard people say that debt free is when your net worth is above zero, which is an optimistic point of view, but a misnomer (in my opinion). My house may be worth $500,000 and my investments may be worth another $50,0000, however if I still owe $200,000 on my house, that does not mean I am debt free, that just means that if you give me enough time I might be able to get rid of my debts, that is not debt free. You still owe $250,000, so you are not debt free.

I am also speaking of all debts, so if your parents were kind enough to loan you $50,000 to help with your home’s down payment, and you have paid all your other debts off, but you have neglected to pay back that loan, you are in debt. This one is really only my opinion (and many families would argue that is not the case), but seriously, if you owe your family money and you have no other debts, what kind of schmuck are you to not pay them back? (look up schmuck in the Joys of Yiddish)
Here is my reader question, is this an incorrect definition of Debt Free?

{ 12 comments }

{ 12 comments… add one }

blitzer September 24, 2012 at 10:54 am edit
Great post and comments. What about RRSP contributions? Would the tax liability be considered a debt?

Reply
Simply Rich Life September 20, 2012 at 10:29 pm edit
I didn’t know there were people who considered a positive net worth “debt-free”. Must be something they hope to achieve eventually after making their “good investment” in a luxurious overseas vacation that they “really deserve” instead of paying off their credit card bill that’s “just so unfair”

That said, as Michael pointed out I’m quite comfortable with not being debt-free. With current interest rates it could be harmful for someone who is well-organized to rush to that point. I may never be debt free and as long as the net worth keeps advancing, that’s ok.

Reply
Denis September 19, 2012 at 11:40 am edit
I have no debts ATM, but I know that I will owe $1700 in taxes in April 2013. That means I am having to save money for that time so that I can pay the money owed.

Is it a debt right now? Technically no, but it will be one eventually… If someone gets REALLY technical, I owe 5 months of taxes NOW, so yes? No? Dunno…

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- bigcajunman September 19, 2012 at 12:04 pm edit
  You can make the same arguments about if you Rent, are you permanently in Debt? What about the Windows on my house? They will eventually have to be replaced (of course), so is that a debt?
  
  Reply
Jonathan September 18, 2012 at 6:24 pm edit
“From this Debt Free must mean owing nothing or not bound to pay or perform for another.”

By that definition, I suppose we can come to the conclusion that taxes are a form of debt.

Reply
- bigcajunman September 18, 2012 at 6:50 pm edit
  I think taxes are part of Cash Flow as well?
  
  Reply
- Joe September 19, 2012 at 9:49 am edit
  Taxes adjust with your income and come off your gross. Yes, if you don’t pay them they’re owed — and that would make you not only a debtor but an idiot. It’s just an ongoing bill that is required if you want to be part of the economy and earn money (you can voluntarily retract if you wish). It’s your part of the bill for society’s critical infrastructure, as well as your portion of the bill for eHealth and F-35s.
  
  Render unto Caesar that portion of your cash flow which is Caesar’s. Render unto Little Cesar’s that which is payment for your pizza and Crazy Bread.
  
  Reply
Joe September 18, 2012 at 10:01 am edit
Monthly bills, credit card included, are just part of cashflow management assuming you pay them off every month.

Great post, BCM. Bang-on.

Reply
Michael James September 18, 2012 at 9:11 am edit
I’m with you that just having a positive net worth is nowhere near the same thing as debt-free. I guess there are some fine points. I routinely owe money on my credit card at the end of each month. I also owe money for the hydro, natural gas, and water I’ve consumed. But these things don’t really seem right to count against someone for debt-freeness. As long as your monthly accounts are paid in full each month and you have no other debts, I’d say it’s fair to call yourself debt-free.

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- bigcajunman September 18, 2012 at 9:34 am edit
  All good points and clarifications on the statement, I have no issues with them, makes for a better definition.
  
  Reply
- Elizabeth September 18, 2012 at 11:02 am edit
  Totally agree — with the post and Michael’s comments. I’m going to nitpick on the credit card thing though. IMHO, if you’re using it as a convenience — e.g. in place of cash to order something online — then it’s not a debt if you pay the balance every month. (It’s just a tool for planned spending.)
  
  If you’re using it to buy time — e.g. I’ll can’t afford x now but I can afford it on my next pay cheque — then I think it’s debt territory. In the first scenario, you’re spending money you already have. You could pay your credit card bill right after you bought your item. In the second scenario, you’ll spending money you’ll have in the future. (Which is essentially what you’re doing when you take out a car loan or mortgage.)
  
  Maybe this doesn’t make much sense Agree? Disagree?
  
  Reply
  - bigcajunman September 18, 2012 at 11:21 am edit
    The Cash Flow statement by Joe is topical for your point of view on paying things off every month. As soon as you are attempting to delay payment, you are not really out of debt, since that is a debt?
    
    Reply

Let’s DEFINE Debt Free

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