Which of the following statements best explains why avoiding debt can contribute to financial freedom?

• A. It eliminates the need for budgeting.
• B. It reduces financial obligations, allowing more income to be saved or invested.
• C. It increases tax liabilities.
• D. It guarantees higher investment returns.

Answer: (B)

Verified step by step guidance

1. Understand the concept of financial freedom: Financial freedom refers to having sufficient income, savings, or investments to cover your living expenses without being overly dependent on debt or external financial support.
2. Analyze the impact of debt: Debt creates financial obligations, such as interest payments and principal repayments, which reduce the amount of disposable income available for saving or investing.
3. Evaluate the options provided: Consider how each statement aligns with the concept of financial freedom. For example, eliminating debt does not guarantee higher investment returns or increase tax liabilities, but it does reduce financial obligations.
4. Focus on the correct explanation: Reducing financial obligations by avoiding debt allows individuals to allocate more of their income toward savings or investments, which contributes to financial freedom.
5. Conclude that the correct answer is: 'It reduces financial obligations, allowing more income to be saved or invested,' as this directly supports the goal of achieving financial freedom.