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I have to admit that since I paid off my credit card debt, I haven't talked too much about debt reduction. Even though credit card debt, car loans and the like are considered "bad debt" and home loans and student loans are considered "good debt", the fact still remains that debt is debt. If you owe someone money for something, your are in debt.

Five reasons to pay off debt:
  1. Better Cash Flow. Once you pay off debt, the money you used to send to creditors every month can be used to increase your net worth. You can now use the money to increase your savings account balance or invest more money in the market.
  2. Interest Savings. Once you are no longer paying interest to the credit card or loan company, it gets a little easier to build wealth. Each payment you make to a bank is helping the bank to build wealth. Make those payments to yourself and build your own wealth.
  3. Better Financial Flexibility. It's nice to not have to figure out how to spread out your paycheck in order to cover all of your obligations each pay period.
  4. Better Credit Score. One of the major components of your credit score is the amount of debt you have. It's a very simple correlation; less debt = higher credit scores.
  5. Better Sleep. Once you have paid off a significant amount of your debt, it gets easier to go to sleep at night. You no longer toss and turn trying to figure out how you are going to make ends meet and/or get everyone paid on time.
I can't believe how much of a psychological boost I got when I paid off the remainder of my credit card debt. I started to sleep better at night and I was in a better mood overall. I no longer felt like I had a huge weight on my shoulders.

It only took a few months for my savings account to start to reap the benefits. After I paid off my credit card debt, I had over $400 per month in extra money. It felt so good to be able to redirect my payments as deposits to my savings account instead of small payments toward my debt.

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  1. the weakonomist // March 30, 2009 at 8:59 AM  

    It's all about the cash flow in my opinion. I made $1,000 car payments to get my car paid off in a year. After that year I have an extra $1,000 a month coming in. That is the most fantastic financial feeling.

  2. sara l // March 30, 2009 at 7:17 PM  

    I'm all for being debt free, but doesn't being debt free end up hurting your credit? There's that fine line between enough debt so they know you know how to pay and over utilization. Regardless, we're working on getting things paid down.

  3. BeyondBeerMoney // March 31, 2009 at 12:47 AM  

    Also take into account what type of debt you have.

    Debt for depreciating assets (i.e. the latest shopping spree at the mall) needs to be paid off as quickly as possible whereas a mortgage on a home offers tax breaks and other incentives for keeping it a little longer.

    That said, for most young single guys (and gals), debt tends to take the form of credit card which can cost you interest of up to 20%!!!

    With fees like that, you might as well be throwing your money out the window.

  4. Horlic // March 31, 2009 at 4:32 AM  

    poYeah!!! I'm free of debt too... From very small my parents thought me I should not owe money. This is bad habit and it will bring no value to you. If happen that I owe someone money I will feel horrible and sleepless. Yap, I’m agreeing with you... better sleep….

  5. Baker @ Man Vs. Debt // March 31, 2009 at 7:40 AM  

    It's true being debt-free can lower your actual credit score, however if a lender was to pull your report and look at the big picture often it will put you in an even better light.

    I agree that financing depreciating assets (random purchase, cars, boats, etc...) is definitely not a way to build wealth. It should be noted, however, that the tax breaks for owning a home do not immediately justify paying on one for the rest of your life.

    You can get into "bad debt" even when dealing with mortgages by overextending, buying impulsively, or buying without a commitment to stay 4-5 years.

  6. Keith // March 31, 2009 at 8:50 AM  

    I do like the idea of being debt free, in fact I am almost there! My situation may be a bit different than some here as I went through a divorce several years ago and left that marriage with $20,000 in unsecured debt. I decided I wasn't living my life that way and started learning and applying the principles I write about on my blog. Thankfully, I am very near being totally debt free. It's a good feeling for two reasons. First, to know those principles work! Second, it is a great boost psychologically, knowing you can begin increasing your net worth and improving your credit score. I appreciated this article and enjoyed the comments. Thanks!

  7. DL // March 31, 2009 at 10:33 AM  

    I completely agree with you on the "sleeping better" idea. I've piad off 10k in credit cards in the last year and each week I feel progressively better. I can't wait to see how I'll feel in 2 months when I'm completely debt free!

  8. MoneyEnergy // April 1, 2009 at 12:40 AM  

    For me the key is not in getting the cards (or other debt) paid off, it's in KEEPING THE IT OFF. No point in achieving debt-free status just to have to go into debt again. I call this the yo-yo debt diet. So you have to make sure you also have a *staying out of debt* plan at the same time. I've paid my cards off in full now I can't count how many times, but if I need them again, none of it matters.

    And I agree most with the point about creating more cashflow for yourself. Personally, just having debt on cards doesn't get in the way of my sleeping at night...

  9. Jerry // April 28, 2009 at 9:56 AM  

    You're absolutely right that paying off your debt leads to better sleep. It did for us. We've paid nearly all of our credit card debt and it has felt soooo good. We've got only about $600 left and we'll use our tax return to get it done. There's just no insurance that you'll stay in your current job situation so if you limit your liabilities you're in a much better position.