A Comprehensive Guide to Debt



credit card point rewards debtWhat would your life be like if you held no debt?  I’m not talking about just paying off short-term debt like credit cards, medical bills, or student loans.  I’m talking about all your debt, including your mortgage.  What would that freedom allow you do?  



Simply put: I hate debt.  


Proverbs 22:7 says, “The borrower is slave to the lender.”  I couldn’t agree more.  Once you are in debt, you may fall into a perpetual cycle of accumulating deeper debt.  The more debt, the less freedom.  It can even cause major health issues.


Did you know that you those with high debt are:

  • debt3x as likely to have had ulcers or digestive tract problems, compared with low levels of debt stress.
  • 3x as likely to have migraines or other headaches.
  • More than 7x more likely to suffer severe anxiety.
  • Almost 6x more likely to have had severe depression.
  • 2x more likely to experience a heart attack.


Debt can clearly do terrible things to your body.  On top of that, debt can also wreak havoc on your marriage.  Survey results show that 70% of couples argue more about money than other relationship busters like quality time, household chores, pet peeves, and even their in-laws.  


debtSo what exactly are these financial fights all about?


Most married couples cite frivolous purchases, household budgeting, and credit card debt as the biggest sources of friction.


I believe there are two main types of debt:  Instant Gratification Debt and Wealth Building Debt.  I will go into detail about each and then provide you ways to get out of debt as efficiently as possible.


Instant Gratification Debt

This is any debt that is related to purchases that quickly met your wants and desires.  Even though it gratifies you in the moment, it can cripple you in the future.  Credit card debt is the most pervasive form of instant gratification debt.


Credit Card Debt

credit card point rewards debtThe average household that carries credit card debt has accumulated roughly $16,000 in debt.  


According to Jason Cabler, it will take almost 31 years by making the minimum monthly payment of $320 to pay off the average American’s credit card debt.  This means that you will end up paying basically double ($33,522), for the items you bought.


So the question that you have to ask yourself if you’re paying the minimum payment is, are the items bought really worth double the price you paid for them?


Some people get into credit card debt, not by buying too much stuff, but because of an unforeseen emergency.


I get it.  Things happen.  


But, it doesn’t make this type of debt any less harmful.  We need to break this cycle of getting out of debt only to get back into debt when the next emergency comes.  


Emergency Fund

debt year in review raise child without debtI don’t know about you, but about every year, some sort of unexpected expense arrives for me.


Once you pay off your credit card debt, it is ideal to have 3-6 months worth of living expenses saved to ensure that future emergencies won’t cause you to go back into debt.


So why do all the of the experts say you should have 3-6 months of expenses?


According the latest from the Bureau of Labor Statistics, someone who is currently unemployed on average, needs over 3 months to find work.


But guess what?  In 2010, after the Great Recession hit and the US economy was still climbing out of it, the average unemployed individual remained unemployed for about 25.2 weeks, or almost 6 months.


Car Loans

financial checkup debtAnother form of instant gratification debt is money spent on depreciating assets.  A depreciating asset is one that loses money over time.  Car loans are a prime example.


When is the last time that you sold a car for a profit?  If you answer, “Never”, it’s because cars generally are a depreciating asset (Edmunds).  Did you know that after buying a brand-new car, that it loses almost 10% of its value the minute it leaves the dealership lot?  One year later, it has lost almost 20%.  By year four, it has dropped to almost 50% of its value.  Because of this, I would recommend buying a used car that is at least 4 years old.  This will allow you to still buy a fairly new car for nearly half the price.


I see so many people living beyond their means, driving fancy cars that carry huge car notes.  But do you know what the best selling vehicle among rich person (with an income over $200,000) was?  A Ford F150.  Not a Mercedes, not a BMW, not a Tesla.    


Interestingly enough, the #5 best-selling car among wealth people was a Honda Civic.  So if you are trying to emulate the wise and wealthy, maybe you should gravitate towards the more affordable, more reliable cars versus the luxury ones with astronomical price tags.


So Is All Debt Bad?

debtYes and No.


There are arguments on both sides of the table.  Some financial experts say that debt can be used as a tool to further one’s financial standing.  I, on the other hand, tend to still disagree.  I think debt is too much of a slippery, dangerous slope.  It hinders true financial freedom and all the goodness that that entails.  So in my book, debt is something that should be always avoided if possible.  


Wealth Building Debt

This type of debt should theoretically help you in the long run.  It should bolster your goals.  A student loan, for example, is a type of debt that allows you to invest in yourself.


great expectations finances debtIn my opinion, YOU are the greatest appreciating asset. Research has shown that the higher the education, the higher the employment rate and the greater the earning potential.  According to this College Graduates study in 2011, college graduates earn 84% more money than high school graduates.  You will not ever see me get upset with people that have a plan on how their education will enhance their careers and lives.  


But should you take on student loan debt and attend an out-of-state school versus a local community college or public in-state school?  Most of the research done around this shows the return on investment for public schools is higher than a private school, but if you get into an Ivy League school, the connections that you make there will supposedly benefit you over a lifetime.


Student Loan Debt

So, let’s say that you have accumulated some student loan debt.  Some with student loans hesitate to pay them off because they believe these loans are tax-deductible.  


In actuality, this is a common misconception that these loans are tax-deductible, dollar for dollar, against one’s final tax bill.  In fact, if you make more than $75,000 adjusted gross income as a single individual (or $155,000 as a married individual), these loans cannot be tax deductible (IRS).  


Furthermore, let’s say that you paid $1,000 of student interest for the year.  In addition, let’s say that you are currently in the 25% tax bracket.  This means that of the $1,000, you only get a benefit of $250.  Therefore, in reality, your final tax bill would only decrease by $250, and there would be no taxable benefit on the remaining $750.  Is it really worth paying an extra $1,000 to receive $250 back?



dave ramsey financial peace debtMortgages are another example of “Wealth Building debt”. Today, mortgages can be a necessary evil to afford a home.  With housing prices averaging $272,000 and the wage of the median household making $50,000, it is nearly impossible for an average family to pay for a house without incurring some type of mortgage.  


Since most of us will have to utilize a mortgage to pay for a house, I would encourage the selection of a 15-year or even 10-year mortgage, if possible, instead of the traditional 30-year mortgage.  


While the payment may be slightly higher, you would potentially be out of debt in half to two-thirds as fast, allowing you the freedom to pursue things that bring greater joy than paying mortgage bills each month.   


On a $200,000 loan at 4.5%, a 30-year loan would require a monthly payment of $1,013 and in excess of $164,000 interest.  


As a comparison, a 15-year loan would require a monthly payment of $1,529 and allow you to pay less than half of the amount of interest at $75,000.  While the payment is 50% more, you would be able to not only pay off the mortgage faster, but the difference that you would pay in interest is more than double.  This is a great deal if you can afford it.


Debt Elimination

There are two main ways of knocking out the debt.


debtDebt Escalator

The Debt Escalator involves listing out all your debts from lowest balance to highest balance.  You would then continue to make the minimum payments for all of your debt and then apply any extra money towards the smallest debt.  You would continue to do this until you have paid off the smallest debt.


The freed up money from the extinguished balance can then be applied to the next smallest debt and so on, until you have paid off all of your debt.  And you slowly go up the moving escalator.


The psychology shows that most people are more likely to follow through with the Debt Escalator plan due to the nature of “quick wins”.  Each time you see an account paid off in full, there is a feeling of accomplishment that boosts our self-esteem, and you are able to take the next step upward towards paying off the next debt.  In turn, we really believe that we can really follow through with these plans because each step brings you closer to the top.


Debt Elevator (Interest Rate Prioritization)

debtThe Debt Elevator starts at tackling the debts with the highest interest rates first.  Psychology aside, this way is the preferred method of debt elimination.  But it does take some discipline and diligence.  


Once you pay off the debt with the highest interest rate, you would then apply the extra cash to the debt with the next highest interest rate until you have paid off all of your debt.  Much like an elevator, you drop from floor to floor fairly rapidly.


Which to Choose?

There are pros and cons to each of these methods.  The first method involves the psychological benefit of small wins that a debtor gets from paying off each debt.  


While it may take longer to pay off all of the debt, the “wins” experienced in the Debt Escalator may help you to stay motivated to continue paying off other debts.  The second method should help you pay off the debt faster since you are paying less in interest.  However, some people become discouraged when they do not see their balance go down as fast.  Determining which method would be most effective is really an individual choice.


But just as a caveat, in a 2012 study by Northwestern’s Kellogg School of Management, researchers found that “consumers who tackle small balances first were likelier to eliminate their overall debt”.


Paying Down Debt

A common question I receive is, should I stop contributing to my 401k, which includes an employer match, in order to focus on paying off debt?  


My answer is MAYBE.


If you have debt interest rate balances over 8%, stop making contributions into your 401k until you have annihilated all of your debt over 8%.  Once your debt is under 8%, start contributing to your 401k again while still continuing to paying off your debt.


Why 8%?  It’s because this is what the stock market has returned on an annual basis since 1926.  Makes sense, doesn’t it?


So there you have it readers. What do you think about the write-up on debt?  Anything else I should address?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.


  1. Personally, I’d say that the only “okay” type of debt really is a mortgage that is a reasonably small part (30% or less) of take home pay. Everything else is a wealth-destroyer. I’ve spoken to so many people in their 40s and beyond who are still struggling with student loans. I’m just not so sure that debt is worth it.
    Financial Coach Brad recently posted…5 Steps to Help Your Child Avoid Student Loan DebtMy Profile

    • Thanks for sharing Brad!!! I have definitely heard from people as well that are still struggling with student loan debt. They definitely wish they had gone to their in state school instead of a private school out of state. It can definitely be a wealth killer.

  2. Well I know I’m the odd duck but I have made a profit on a car in the past. Then again older sports cars can be closer to collector items then cars.

    Where do you stand on leverage and interest rate arbitrage. For example I have a car loan at 0 percent and an investment of the same funds in a cd at 2 percent over the same term. I can gather your against risk based leverage.
    FullTimeFinance recently posted…Of Charm and PursuitMy Profile

    • That’s amazing that you are able to capitalize on interest arbitrage. If you are able to use that type of leverage I say go for it. Personally I’ve found some people will in turn spend the money and not take full advantage but it makes a ton of sense if you can do it.

  3. I have no issue with debt and I get excited about properly managing them. I also tried though to be on a conservative side by provisioning all debt when computing things like networth and such so i make sure i knos that debt has a price to pay.
    B recently posted…2017 Half-Yearly Reflections ReviewMy Profile

    • Thanks for sharing B!!! Sounds like you know how to utilize debt for wealth building. I wish I didn’t wake up in a cold sweat worrying about making the next payment. It’s definitely more of a headache for me than I’d like to admit.

  4. Being debt free is definitely a great feeling. I think that I may want to try that out one day, but not now. I definitely think that people should manage their debt responsibly and get rid of all consumer debts asap as these debts cost you money and stress.

    On the other hand, I disagree that all forms of debts are bad. I use my investment loans, which I called good debts to help me build wealth. I purchased dividend paying stocks that pays me a reasonable yield that more than covers the cost of interest and taxes. Hence, I am getting a free shot at capital appreciation in the long run.

    Debt is only bad for you if you buy depreciating assets. It’s great if you can buy assets that can pay you and there are opportunities for appreciation in the future.
    Leo T. Ly @ isaved5k.com recently posted…Lessons From A Young EntrepreneurMy Profile

    • Thanks for sharing Leo!!! I definitely agree that there are many forms of debt that can allow you to leverage and grow your net worth. I don’t fall into the camp that all debt is bad as long as it’s properly managed 🙂

  5. For wealth-building debt, I’d add rental property. I realize that many people won’t have rentals, but that is an important aspect to consider. If I recall correctly, Dave Ramsey says you shouldn’t take on debt for rentals. Am I right there?

    What are your thoughts on rentals being a source of wealth-building debt? I remember you had an article a few weeks back about your friend who lost a ton when she purchased property site unseen. I would say it depends on how involved you are, how many properties you review, how much you know about the area and how much you put down. Plus, things like taxes, maintenance, and market rents.

    • Thanks for the great addition Dave!!! Rental properties can be a great source of wealth especially if you buy one using the 1% rule. I will definitely need to add that one in there. Thanks!!!

    • Thanks for sharing Ms. FAF!!! I definitely agree debt stinks and I’m glad I don’t have anymore debt. I dread thinking about having to get back into debt for any reason 🙂

  6. Mustard,
    I love the blog, keep posting!
    “Mortgages are another example of “Wealth Building debt” – I think this could be a gray area, let me explain:

    It seems that house prices have risen at a pace that doesn’t keep up with inflation historically. (http://michaelbluejay.com/house/appreciation.html – I know it’s a guy in a suit that looks like Weird Al, but other sources support these general numbers.) So, you are borrowing to buy something that may just keep up with inflation. But a house has a lot of maintenance costs! Investments don’t normally need you to pay into them. You also have to insure your investment, and rent the land it is sitting on (taxes). Also, your investment is not very liquid, you need to live somewhere! So, am I against home ownership? Nope, I own a home. Are they wealth building? I would argue only in the fact that owning a home forces you to save. You are forced to pay some principal, and your home does appreciate, well most of the time. So, in the end could it be the better expense vs. renting? Yes, or maybe not, that really depends on the situation.

    So why all this blabbering? I just run into people every day that aren’t saving like they should (so probably not most of you reading this, hopefully!), and they consider their home their investment. It could be the right housing choice for them vs. renting. They may very well end up gaining money, but if all the costs are taken into account, it’s not a ‘good investment’. They should be investing on top of owning their home. I am just trying to get people to think and see how home ownership is not a cut and dried good idea or bad idea. There is a lot involved! (You have inspired me, I am going to ‘spreadsheet up’ a Home Ownership vs. Renting scenario and write it up soon!)
    The Tepid Tamale recently posted…Birthdays – It seems like they come around every blasted year!My Profile

    • I’ve read the same study on housing. If anything a house is a forced savings account and not much more than that. It’s not the great investment that real estate agents would have you think 🙂

  7. I’m with you on your feelings towards debt. We do have the mortgage yet but everything else is in order. Now I do struggle with the thoughts of paying that off aggressively vs investing. Interest rate is fairly low but being totally debt free would be so dang nice.
    Mr Defined Sight recently posted…Ditch Your Job Like A Bad RelationshipMy Profile

    • Thanks for sharing Mr. Defined Sight!!! It’s definitely a struggle between investing and paying off the mortgage. I paid of my mortgage and I’m so glad that I did but for others more comfortable with debt it’s not something they’d even consider 🙂

  8. Great post. I’m always a little skeptical of the “good” debt angle, unless you’re pretty asset-poor. We have some fixed income in our asset allocation, so in almost all cases (even with a mortgage) it makes sense for us to pay off debt rather than have the debt AND fixed income investments.
    Paul recently posted…On GratitudeMy Profile

  9. I agree that debt is pretty terrible and should be paid off quickly. Student loans are a necessary evil for most people but keeping them around until you are 45 isn’t. I don’t care if you have a good interest rate.

    Real estate, especially with the current low interest rates, are the one area that I think some is okay. As you said it would be very hard to save up for the purchase price while paying rent. Homes generally appreciate in worth and can be used as rentals.

    Also I have seen that F150 study before. I believe this result is only because high income earners tend to have multiple cars and may also have F150s as company cars. I don’t know many but everyone I personally know that I know makes 200 grand a year all drive luxury cars.
    Grant @ Life Prep Couple recently posted…Embrace Pain For a Better LifeMy Profile

    • Thanks for sharing Grant!!! It totally makes sense that people would have work trucks as their company cars. I’m on the other side of the coin and all the people that I know that make $200k have Hondas or Toyotas. Interesting perception that we both have 🙂

  10. I hate having to owe someone for something but there are certain situations where you can’t avoid it.

    I’m currently looking for a vehicle to buy but I don’t have enough money to pay cash so I have to get a loan 🙁

    However​, I’m exploring my options to get a car loan with a good interest rate for me. Some interest rates from banks are ridiculously ​high so you should do proper research before committing to the loan.

    Try a credit union near you. Their rates may be better than the banks.
    Cory @ Growing Dollars from Cents recently posted…How To Get A Free Professional Email AddressMy Profile

    • Thanks for sharing Cory!!! I definitely agree that credit unions are a great option and definitely something to be considered if you are taking out a loan.

  11. Thanks for the overview Rob. I can say from experience dumping our consumer debt reduced stress and strengthened our family relationship. If you have any questions bout getting rid of debt just eliminated your debt payments consumer debt, mortgage, etc from your monthly budget. Imagine what you could do with the surplus?
    Brian recently posted…Redefining Debt DisciplineMy Profile

    • Thanks for sharing Brian!!! I totally agree that getting rid of consumer debt is a huge burden reliever!!! I definitely agree just imagine what you could do if you didn’t have this debt 🙂

  12. Nice write up Rob. I hate debt too. Those statistics on high debt are just sad.
    Feels way better not paying interest every month. We are working on eliminating a 15-year mortgage to be completely debt free.

  13. In your personal life, you are likely correct that debt will erode your financial (and physical) health. Consider if everyone felt the same way as you and avoided debt like the plague.
    1) the mortgage market would shrink considerably
    2) the auto market would shrink considerably
    3) the credit card market would shrink considerably
    4) the student loan market would shrink considerably
    5) the HELOC market would shrink considerably
    All these would lead to lower earnings (likely losses) at banks, financial institutions, car manufacturers, home repair contractors, etc. The US economy would be much weaker if this debt didn’t grease the skids.
    If you use a credit card, you are likely benefiting from carrying debt. Don’t you take advantage of the grace period. That is essentially a recurring 0% teaser rate.
    There is an allegorical tale that I cannot recall at the moment that encapsulates your attitude towards debt. Essentially if a few people do it, they are better off but if everyone does it, everyone is worse off.

    • Thanks for stopping by Dan!!! Really interesting analysis. I do wonder how many industries would fall apart if people stopped spending money. I guess we’ll see based off some habits millennials are developing.

  14. Thank you!!! for finally explaining the 3 – 6 months! I’ve always wondered where they pulled that number from.

    I think paying off debt is definitely a great idea. I’m super fortunate to have never been in a position where I’ve had debt. I wonder though, what’s your opinion on getting a 30-year mortgage to take advantage of inflation rates? I’m terrible with math, but if you’re doubling the amount of interest you’re paying with a 30-year mortgage… at what point does it make sense to swallow that double interest and instead invest your money, and invest in inflation? (I’ve been reading Frugalwoods, and that seems to be their strategy – I could be wrong about that though)
    Ms. Raggedly recently posted…Public Library Uses: There’re A LotMy Profile

    • Thanks for sharing Ms. Raggedly. I would have to look into the inflation calculation. It’s a great argument and one that I haven’t explored before. Sounds like a great next topic 🙂

  15. The health statistics are crazy that you mentioned. I didn’t know debt can affect your body in such a way. I suppose financial health is linked to personal health as well. If someone does have a high amount of debt, the main thing I would suggest is a solid plan of action to eliminate it by a set date and stick to the plan.

  16. I have experienced the pain of debt firsthand, both student loans and otherwise (though especially student loans)! I’m not a fan of student loans at all.

    It may help to think of other principles related to debt. If I’m taking on debt, am I creating bondage? Will I be tied to future promises that I may be unable to keep (without relying upon other future promises)? For instance, will I have to have a job making X$/year, or can I pay this debt off already, using my savings? If I can pay it already, there’s no bondage there, and it’s less troubling. I rent every year, but I have enough saved so that I could theoretically pay the entire rental contract for the year, so it’s no bondage. And there’s also a question of whether it’s good stewardship.

    Debt itself isn’t banned, but it’s to be avoided. Most often (in the US), debt comes in the form of bondage. And bondage, I suspect, is what drives those health problems. We need X$/month to pay the car payment, the house payment, and so on: we’re in bondage to debt.

    But we don’t need to be: we can live simply, get out of debt (as we both have), and live in freedom.
    Finances with Purpose recently posted…Living the Simple Life: an Encouraging Visit with a FriendMy Profile

    • Thanks for sharing Finances with Purpose!!! That’s a great way to think of debt. Bondage. Thanks for sharing your perspective on student loans, I really appreciate it.

  17. I hate debt, and love my debt free life where I can invest and have fun with money. And I remember that feeling of anxiety every month when I had to find $525 to send for my car loan.

    Mrs. FR and I have a goal to buy a house in spring of 2020, we are working hard to save as much as we can, and will be really happy to buy without taking a mortgage. But to be honest, I don’t know if we can…
    Friendly Russian recently posted…How to budget the Russian wayMy Profile

    • Thanks for sharing Friendly Russian!!! I definitely agree that living a debt free lifestyle is ideal. I definitely would love to stay out of debt if I can 🙂

  18. Proverbs 22:7 says, “The borrower is slave to the lender.” This is accurate. We’re such a debt society here in the US. My wife and I are debt-averse. We’ve paid our tuition, and I’ve been cash-flowing her private NP school tuition. It’s expensive. First year was $70K tuition, and $50K each year for 2 years thereafter. Good thing is that I have a relatively high income. And my wife has a decent income as well. She’s going to school and working at the same time. The only loans we have on the books is for our house, and for our two cars (now I know what you’re thinking). They’re both Honda Accords that i bargained the crap out of (I used to work in car sales, so I know the inner workings fairly well). And the interest on both is 0.9%, which I felt I could easily beat in the market. By the way, this doesn’t mean we over-leveraged for the cars either. I have cash in the bank to pay for both cars in full today if I wanted to. So all in all, hate debt!

  19. We do also leverage debt to increase our real estate holdings. It’s just a great tool to expand wealth and increase yield, as you don’t need as much of you own assets to get started. That being said, that’s all the debts we have!
    Team CF recently posted…May 2017 Dividend UpdateMy Profile

  20. We leverage our mortgage too (like half the people above me hahaha). Talking about the interest at 4.5% makes me a little queasy. But it’s apparently a good rate (anything under 5%) historically. I can’t believe people to it loans over 8% before the housing bust. Eeeesh

    Hubby and I go car free. God gave me feet and I’m using them.

  21. Great Article MSM!

    One potential correction is on the Rate of Return for 401k contributions where there is a match. For the portion where there is a company match the rate of return is MUCH MUCH higher than any credit card interest and in almost all cases should be prioritized above paying down credit card debt, at least from a rate of return perspective.

    For example, ff an employer offers a 50% match on the first 10%, the employee would contribute $10k and the employer matches $5k. If the employee is in the 25% tax bracket then there is a savings of $2,500 due to the $10k being contributed pre-tax + the employer matching of $5k. The return on invested capital is ($5k +$2.5k) / $10k = 75%!

    Thankfully there are no credit cards charging 75% interest so if possible I would recommend investing up-to the employer match then prioritizing high-interest credit card debt.

  22. Great post! You really can’t underestimate the impact parents can have on their kids. My parents always taught me that debt was bad (it took me forever to get my first credit card because I used to think they were as bad as drugs). It’s made it a lot easier for me now. I once heard that one key difference between the wealthy and the poor is that the wealthy have interest working for them through investments, while the poor have interest working against them through debt. A financial education can really make all the difference!
    Matt Kuhn recently posted…4 Most Common Fears of Retiring Early and Why You Don’t Need to WorryMy Profile

    • Wow that’s some powerful words. Makes a ton of sense that the wealthy have interest working for them and the poor against them. Thanks for sharing!!!

  23. Totally. Not all debt is bad! Sometimes using debt can help you get ahead in life — and as you mention, car debt isn’t one of them! Thanks for clarifying that as Debt has become a four letter word. Debt is : used carefully you can get make a nice meal. Without the proper care, it can burn down your house.
    JT recently posted…Parable of the Talents: How Does God Think About Money?My Profile

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