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.