The Beauty of No Debt

I am a big fan of second generation FI. I believe the knowledge and financial savvy we develop should be passed on to our children. The major method to accomplish this feat is good financial modeling. Our children will one day mimic what we do (not always what we say). You can leave your child a pile of money, but true riches come from the knowledge of being a good financial steward. There is one case, however, where directly giving your children cash makes sense. I’m talking about education. I can not overestimate the beauty of no debt in propelling my early economic success.

I graduated medical school with a positive net worth thanks to my parents.

I have never looked back since.

My Story

As I have written before, the cost of my debt free upbringing was expensive. My siblings and I had our educational expenses paid through my father’s life insurance policy. While I would have much rather had my father back during childhood, his insurance was a gift that gave for decades.

His policy of $200K invested in the early eighties paid for several college educations, two doctorates, and still had money left over to distribute after we all finished schooling.

The beauty of no debt was that I could start saving and investing from day one. The power of compounding tells the rest of the story.

Compounding

Most of the people reading this blog understand compounding. Money invested in your twenties will grow exponentially over the years, and will be worth far more than if you invest the same amount of money a decade later. The earlier you are debt free and can start saving, the bigger the pot of gold at the end of the rainbow.

Although positive compounding is quite familiar, many fail to consider negative compounding. Loans tend to compound, and interest adds up over the years. The faster you pay off debts, the less negative compounding occurs.

If you never have any loans in the first place, you avoid this phenomenon altogether.

And this is truly a big part of the beauty of no debt.

Hopelessness and the Hedonic Treadmill

We have all heard of the hedonic treadmill. Increasing spending leads not to more happiness, but instead more spending. A problem that is magnified by debt.

Why?

People in debt, especially large amounts, tend to become hopeless. They fear that they will never make a dent in what they owe. So why not splurge just this once?

When splurging starts to feel good, it makes an otherwise powerless person feel powerful. And the hedonic treadmill kicks in in such a way that the only good feelings surrounding money are when it is spent.

The beauty of no debt is that this hopelessness never exists in the first place. People with loans start their economic life in a pit and have to climb mercilessly just to make it to level ground.

I didn’t have to do that.

Final thoughts

I believe my children should work towards their own financial success. I think they should make their own way in life. So I will financially provide for them when they are children, and teach through good financial modeling and mentorship.

And I will pay for education.

One of the bests gifts I can give is to share the beauty of no debt.

The rest is up to them.