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When you have cash on hand to cover it, debt isn't always bad.

I used to think just like you. I cringed when we paid cash for our car instead of financiing it. I thought I wanted the cash in the bank.

Funning thing, now that I don't have that payment, I have the car and cash in the bank. Get off that thinking you have.

I’ve done both, although I haven’t had a car payment in many years. Certainly you don’t want to have a paid off car and no cash on hand because you have it tied up in a car you can’t borrow against. But if you have adequate cash reserves beyond the cost of the car, it’s probably prudent to pay cash for the car, or just buy less car. You just have to realize that when you finance something you can pay cash for, you are paying for the flexibility of having cash readily available. That is different in my mind than paying for it with money you haven’t made yet.

I tend to invest rather than save, so I don’t keep large bags of cash around. When an unexpected expense comes around, I am sometimes willing to pay a finance charge to maintain my investment strategy. Not always, but sometimes.

Liquidity is worth something in finance. I’m glad it worked out for you, but if you had made yourself cash poor to avoid the loan, you may have put yourself at risk unnecessarily (not saying you did... I don’t know your situation). Cash flow problems can get you in trouble. Liquidity at some level (not on everything, but the proper amount of liquidity) is insurance against cash on hand going negative, which is a bad time to try to borrow your way out of it.

But that doesn’t mean it is the right solution in every case. As a general rule, I agree that if people can’t evaluate the cash versus credit decision intelligently, they should default to using cash.

I have the car and cash in the bank. Get off that thinking you have.

A house is different, because it does not lose half its value every few years.

Maybe the smart approach for those tempted to pay off is to get a fat line of credit that you can tap in an emergency.

One other factor I didn’t see discussed: a paid-off house is a juicy temptation to greedy trial lawyers. If you are paid-off, you’d better consult a specialist lawyer about responsible ways to protect your assets.