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Are we in Debt?

Are we in Debt? It’s an interesting and more complicated question then what first comes to mind. Today we will explore what it means to be in Debt and whether we meet the definition.

Defining Debt and Deficit

Lets start with a few definitions. We will use the federal government as an example. There are two things we talk about when we refer to the current government position as in debt. The first is the deficit. This is the concept that in any given year the government spends more than they take in from taxes. In the same way you as an investor can run a deficit, by spending more then you make in any given time period. I have commented before on other posts that I have never run a yearly deficit (unless you count the cost of my house purchase in a single year). As such I am not running a deficit.  The second is the debt, or the cumulative amount owed when tallying all previous years.

Utilizing Debt to Get Ahead

Now you know from other posts we have a mortgage. As such we do have debt. In fact I have more than just a mortgage. I have a car loan that I use for leverage. I purchased a car that I could have paid for with cash with a 0 percent loan in order to invest the difference in low risk alternatives. I essentially arbitraged myself a return by taking that same money and posting it on my mortgage at a then 4.5 percent. This derived a risk free return of about 3.8 percent after taxes. I have explored the pros and cons of this prior in the post on Leverage, so I will not go too far down into the pros and cons. But either way it’s obvious we do owe money to someone else. The government has liabilities as well, over 19 trillion as of this writing.

In Debt Versus Debt

But are we in Debt? Note the word before debt, in. Debt has a connotation in this country. The concept of having spent more than you take in over a sustained period of time. Being in debt to me means not just owing money, but essentially having more liabilities than assets to pay the debt with. It may not be obvious from my prior post on financial independence, but I have more than enough assets to pay what we owe. Therefore in my opinion we are not “In Debt”.

The government meanwhile, by most measures, is in debt, but perhaps not all. From a tax revenue perspective the deficit and debt numbers are astronomical. There are some other considerations for the government here we will explore in a moment, but at least per my current definition the government is “in debt”.

Financial Independence and In Debt

Before I move on from the definition of being in debt I want to explore the intersections of the two are we articles. It’s not uncommon for people to equate Financial independence with not being in debt or even having liabilities. In fact I believe even some of the commenters on the “Are we” article referred to reaching that point after paying off their mortgage along with having a large net worth. The thing is, the two are not necessarily intertwined. On the one hand you can be financially independent and hold a mortgage, thus benefiting from leverage. This would be the positive side of having debt as leverage, and yet you still would not be in debt.

Defining In Debt

But can you also be “In Debt” and be financially independent. Well it depends on how you define Financially Independent. If you mean purely a high positive net worth, then most certainly. Go back to what I said about the definition of “in Debt”. “Having more debt than assets to pay the debt with”. The intersection of a high net worth and In Debt is essentially a liquidity event. A liquidity event is where you might encounter difficulty paying your bills or debts because your assets are not available to pay your debts. This is largely what happened to Bear Sterns in 2008. They had a positive net worth, but since they could not access the value of their assets they could not pay what was due on their debts. As such they went bankrupt.

Liquidity Versus Net Worth

This is also why when talking about asset allocations and investing you always hear mention of needing an emergency fund, regardless of how many assets you have. Even a rich person can declare bankruptcy if they cannot sell their assets to pay what they owe. Another great example of this also comes from 2008. During that time period there were many people building real estate empires. Essentially they would use the equity of one home to buy another, and so on until they had both massive assets and massive liabilities.

When the 2008 crash came they had no funds to pay the mortgages on those homes. Also because of the crisis in the country they were unable to refinance the homes removing more equity to help with the loans. As such they lost them in foreclosure. It’s important to remember that not all of the people who lost their homes had a negative net worth, in fact I would guess many had a high positive net worth at the start, but all of them meet my definition of “In Debt”. If you can not readily use your assets to pay what you owe, then you are “In Debt”.

Financial Independence and Liquidity

Which brings us to one add to the question of have we achieved financial independence. Liquidity has to factor in to that question in some way. I did not answer that question explicitly in my prior post, but I will now. I could cash in a taxable account and pay all of my debts, regardless of if my home became unsellable. As such my conclusion from the prior post does not change, I am Risk based financially Independent. If my net worth were locked in some vehicle where it was questionable that I could use them to pay what I owe in an emergency, then to me by the very nature I could not be financially independent.

Is the Government In Debt?

Which brings us back to the government. The difference between you and me is the government essentially can print more money at will. Of course it will devalue the currency and cause havoc on the financial system, but effectively the government has a license to devalue the money they owe until the point where they can pay it. As such by some definitions they are not “in debt” because they can produce the assets necessary to pay their bills regardless of the circumstances. Now the political, moral, and even feasibility aspects of those questions are a topic for another day or maybe even another blog.

What are Your Thoughts?

See I told you the question of being In debt was a bit more complicated then it seemed on the surface. So now it’s your turn, do you agree with my definition and my add to financial independence criteria? Are you in debt?

Feel free to check out the other “Are We” series article on frugality here.


  1. Brad -
    Brad - September 11, 2017

    I agree you can be in debt and still be financially independent – if, like you said, you’re net worth is high enough to easily clear all of your debts if you wanted. That is still “in debt” though. “In debt” isn’t the same as a negative net worth. A common definition would be “the state of owing money”. So having debt means you are also in debt. FI or not.

    • FullTimeFinance
      FullTimeFinance September 11, 2017

      Interesting how two people can read different things into “in debt”. To me in debt is a liquidity state, not a state of owing money. So I have debt, but I don’t view myself as “in debt”. Semantics when you get down to it though. The real goal of this piece, which I hope came through, was to highlight liquidity and its ramifications in a different way.

  2. DC @ Young Adult Money
    DC @ Young Adult Money September 11, 2017

    I think “in debt” means “owing debt,” so you could be worth a billion dollars and still be “in debt.” You brought up a great example of leveraging debt to get ahead. It’s one reason I don’t like personal finance gurus who say “all debt is bad.” It simply isn’t the case.

    • FullTimeFinance
      FullTimeFinance September 12, 2017

      So true. There are good ways and bad ways to use debt. It’s a tool just like anything else.

  3. Dividend Diplomats
    Dividend Diplomats September 12, 2017

    Now that we have a mortgage, I have been thinking long and hard about debt and the role it is playing in my finances. Spoiler, I have an article coming out in a few days about my current debt and analysis. I don’t think it is impossible to be financially independent and have debt. Sometimes it just makes economic sense to invest rather than payoff debt. A 0% or 1.9% car loan is a perfect example of this. You can receive a higher yield in the market, so why not use the excess cash to invest rather than pay down your debt? Student loan debt is a different story as it has a much higher interest rate.

    Anyway, there is no correct answer. Ultimately, FIRE is about retiring comfortably and being happy. If having debt is stressful, then get rid of it all. But if you are comfortable with some debt, it is okay!

    Thanks for the read.

    • FullTimeFinance
      FullTimeFinance September 13, 2017

      I look forward to reading the post, send me a link when it comes up.

      I agree debt as a tool is very personal to your situation.

  4. Mr. 39 months
    Mr. 39 months September 13, 2017

    I agree with you – you aren’t really in debt if you can pay it off, especially if paying it off doesn’t really put a “crimp” in your plans.

  5. Honeyfill
    Honeyfill September 20, 2017

    I agree , debt can be a great leverage opportunity. I am currently “in debt” 20k car loan 2.99% 68 months , 14k credit card 0% until march, 270k mortgage on 420k house, 29 years, 7k daughters college loan 4% 20 years. I plan to keep the mortgage but pay off the other debts at 7k a month out of cash flow. I will be able to comfortably retire in 6 months. If the market tanks , I simply keep the low interest loans and switch the cash flow to buying low priced stocks. I can either keep working or retire with a smaller net income. Fortunately, I have a great job and would not mind working a few extra years years if needed, so I am good either way.

    • FullTimeFinance
      FullTimeFinance September 20, 2017

      Sounds like your in a great position. If you don’t mind me asking what age group are you in?

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