A Life Without Debt: Building Wealth

If you are at all interested in finance, you’ve probably heard that it is necessary to be debt free in order to build substantial wealth. While a few gifted investors manage to build wealth while having a lot of real estate debt (think Trump) or debt that finances a business venture (think the people who started Google), that isn’t the reality for most of us. For most of us, the money we earn from our regular jobs is what we have to work with in order to build wealth. And the only way that money can go toward building wealth is if it’s not going somewhere else (like credit card debt).

I’ve seen this reality in my own debt free life. When we were young, we didn’t have much to invest because we weren’t making much. So we maxed out our 401K’s and built our emergency fund and that was pretty much it. But as our earnings continued to grow (and our spending remained very moderate) we needed to find more and more investment vehicles. So we opened an IRA for each of us. Then we opened some CD’s and some other savings accounts earmarked for shorter term goals. Then we made more money. But we were out of tax deferred places to stuff our money because we were already maxing out everything we could. So we opened some brokerage accounts and started buying into mutual funds and EFT’s. We now have several of those accounts. Lately we’ve started playing around with the individual stocks of companies we believe in. Our total assets (not including home equity) are over a million dollars and we’re in our mid-30’s. Granted, a lot of that is untouchable now because it’s in retirement accounts so it’s not spending money. But it’s there and it counts for us, not against us.

Could we have done this if we’d carried a lot of debt in our lives? Absolutely not. Why? Because if most of our take home pay had been servicing car payments, credit card bills, and a large mortgage, plus daily living expenses, there would have been nothing left over to invest. In order to generate wealth, you have to have money to put towards that goal. It sounds so simple, but it means that the money you want to invest and use to generate wealth can’t be going somewhere else.

Because we’ve kept our spending moderate, carried no debt, and seen consistent increases in our income, we’ve reached a point where we almost have more money than we know what to do with. That’s not literally true, of course. Obviously we will always find something to do with it. We can fund some of our wants and make giving a larger priority. And in the event of disaster that cushion is there. The point is, we have a lot of money coming in that is not “necessary” for us to meet our daily needs.

So what happens to that money? It gets invested. Every raise, every tax credit or refund, every bit of found money above and beyond our daily living expenses gets put somewhere that it can grow. Whether it’s short term savings for a vacation, long term retirement planning, or investing for mid-range goals, it all goes somewhere and works toward building wealth for us. Our goal is to be able, at around age 50, to stop working (or at least work only at work we choose and is meaningful to us) and let our wealth do the heavy lifting, generating income for us from our investments. It’s called Financial Independence.

I had a chance to see how this wealth building process works (or rather, doesn’t work) in other people’s lives when I recently helped a friend with her finances. Her family makes a similar income to ours and is quite similar to us in most ways (size/value of house, age, number of family members, no medical or other disasters to derail their planning, etc.) with one important difference: They carry a large debt load. The have a mortgage payment of $2,000/month. Two car payments for a total of $800/month. Five credit cards with balances for a total of $650/month. And a HELOC that’s costing $500/month. They put $25 into savings every two weeks and put 4% (3% contribution, 1% match) into his 401K every period (but they only started that within the last year). Their net worth, not including home equity (in their mid-30’s): $21,000. For this couple, that’s not even a three month emergency fund, let alone enough to retire on. Yet the woman told me that she thought they would be able to retire early, at around age 55. I hated to burst her bubble, but that won’t happen without some serious debt reduction, spending slashing, and investing.

This couple could have been sitting in the same place as we are, yet they are not because they choose to carry a large debt load. They have put their present desires ahead of their future wealth. Their money is not working for them and building a future, it is servicing debt and paying for past purchases. Could they have made other choices? Absolutely. They could have bought a smaller home, not taken out the equity loan (which I know for a fact went for glossy countertops, flooring, appliances, and a vacation not “needs”), bought cheaper or used cars, etc. Their choices have cost them not just money, but true wealth. By remaining debt free and investing and saving most of our extra money, we have managed to create true wealth and in income that will provide for us long after our working days are through.

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12 Responses to A Life Without Debt: Building Wealth

  1. Debt is a shackle that keeps too many people from enjoying life. Sure that car is nice and your furniture looks good, but you can’t afford for your kid to play soccer and haven’t been on a good vacation in years because you have too many payments.

    I went to business school so I know all about how useful debt can be, but I’m still terrified of it.

  2. Ken says:

    I like to carry a large mortgage for the tax benefits and with rates so low .. I believe over time my investments will return more money instead of selling them to pay off my mortgage.

  3. jr says:

    What are EFT’s?

  4. Shane says:

    A million net worth by mid-30s !! That’s inspiring !!

    Well Done ! :-)

  5. Kate says:

    Shane, I’ll second that! I am truly inspired by your savings success. Being in debt, especially credit card debt, is a hard habit to break, but it’s something that all of us can achieve if we are willing to make small sacrifices throughout our lives. Whether we are choosing a less glamorous car or a more modest home, we can use “the power of small” to make a huge difference in our bank accounts!

  6. Diane says:

    Good for you! It goes to show what is possible when 2 people work together with the same ideals.

    I wish I’d been that wise when I was younger! Though I’m finally debt-free, it has put me years behind in retirement funding.

    I’m trying to teach my sons a better way of doing things. I hope some of the younger readers out there are taking note!

  7. jr says:

    I asked: What are EFT’s?

  8. Sadie says:

    @ jr. EFT/ETF'(some people abbreviate one way, some another) are Exchange Traded Funds. A good explanation of them and how they differ from mutual funds can be found here:


  9. CPA says:


    The many fees you will pay for your house include property taxes, insurance, maintenance costs, repair costs, and interest expense (which your tax deduction only partially offsets). Also factor in any closing costs you paid as well as a realtor’s commission you will pay / have paid. Furthermore, houses appreciate on average over the long term at about inflation or maybe 1-2% above inflation. It is possible that your house is a good investment, but it’s also much more likely that you are missing a chance at earning good money in the stock market or another investment long term because your cash flow is tied up in your house (which you may or may not be making money on – even at average appreciation.)

    Also, that house appreciation mentioned above is not guaranteed by any means, and if you for any reason go into foreclosure you lose your entire investment (in other words, you are risking a lot.)

    Tax benefits and low rates do not necessarily equate to a good investment. Those are just two of many factors to consider when determining if you are making money on a house.

  10. Saddie –

    I think your story is great testimonial of what can happen when people live below their means and practice delayed gratification. I graduated from college about 2 years ago and while I was able to land a nice job with a cushy salary, school left me 45K in the whole. Furthermore, the economy has left me with many job uncertainties. I decided that work alone was not going to let pay off student debt as fast as I wanted to, so I decided to work for myself and started a business. I’ve met with a lot of entrepreneurs in my industry and seen the income potential that is possible if you’re, your own boss and are willing to work hard. I’ve even met 7 figure/yr earners.

    What do you think about business as a means to build wealth? Have you and your spouse ever thought about starting a business? Why? Why not? I am interested in your perspective!

    I look forward to your response. Thanks!

  11. Tg says:

    CPA, I wish everyone would read your post. I have heard the ‘I’m keeping my mortgage for the tab break’ line way many times. It is simply not a good investment for the reasons you outlined.

  12. James says:

    Well said Sadie. The long term difference of a life spent saving and investing really starts to tell in your mid 30s.

    My wife and I managed to get our wealth up to 1.1 million, using what seems like a similar process to you.


    The one thing we are doing that you don’t seem to involved in as much is investing in real estate. So, for example we have a couple of investment properties which help to build our net worth.

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