Living debt-free in today’s world can seem like a difficult proposition. From student loans from credit cards to car bills, the possibilities to take on debt are endless. But if you’re committed to a debt-free lifestyle, it’s definitely possible with right thinking and solid strategy.
Let’s examine the pros and cons of living debt-free, and then dive into some of them tips on how to do it and live without debt!
The benefits of living debt free
Before installing any new financial goals, it is always important to have a good understanding of the reasons for this. The same goes for living debt-free. So let’s start with the benefits of debt free living!
All your money is your own
Essentially, debt is money promised to someone else. This means that not all the money you earn is really yours.
When you look at your paycheck, you’ll mentally deduct “$X for the car, $X for the credit card,” and so on. And when you’re adding up your net worth, you’ll need to make some deductions as well.
Everything changes when you live debt free. Every cent you earn is yours and adds to your net worth.
You decide how to use your money instead of having some of those decisions made for you. In short, it puts you back in control!
You don’t have to pay interest
Especially if you are dealing with high interest consumer debt, this can be a very beneficial advantage! Many banks charge double-digit interest rates on credit cards, which can quickly send your debt out of control.
That’s why paying off credit card debt should be the #1 priority on your path to a debt-free life.
Other types of debt, such as student loans, mortgages, and auto loans, often have lower interest rates. However, they pay any interest makes purchases more expensive over time.
You’ve probably heard stories of people who have spent years paying off student debt and still owe the same amount or even more! This is the danger of runaway interest.
It teaches you discipline and frugality
Spending habits are closely related to psychology.
If you’ve historically had a “spend it now, worry about it later” mindset, a debt-free lifestyle will completely turn that around. It makes you really accept an inventory of your needs, wants and financial realities.
You can ask questions like, “Can I afford this right now? How long will it take me to save for this? Do I really need it, or should I keep the money for a greater purpose, and how many hours of work does that money represent?”
It’s normal to experience some growing pains when changing your mindset from instant gratification to delayed gratification. Fortunately, there is seven habits to improve self-discipline that you can learn.
You can put money into investments instead of debt
If you currently have a lot of debt (or have just gotten rid of it), this is the perfect opportunity. You are already familiar with life without this money every month!
It reduces financial stress
You may not realize how much debt is affecting your mental health until you are free of it. Debt can seem like a trap.
You may feel limited in the choices you can make. Your debt can keep you stuck in a job you hate. This can stress you out a paycheck to paycheck lifestyle.
There are many strategies for debt stress managementbut of course there is no better way than to become debt free and stay that way.
Disadvantages of debt-free living
It may seem strange to say that living debt-free can have negative results, but it’s important to have a complete understanding of what you’re getting yourself into! Here are some things to consider.
Have “positive debt”
When people talk about “getting out of debt,” they’re mostly talking about “bad debt.” This means credit card debt, expensive car loans, personal loans, etc.
But there there is “good debt” too. This refers to debt that you can use to your advantage.
Some of the best examples of good debt include:
- Your home/other property
- Student loans for a good career
- Business loan for an entrepreneur
These are all big expenses that can improve your financial future, not hurt it. Taking on “good debt” can actually be a wise choice in some cases.
For example, buying a house can save you money on rent. A degree can too help you get a higher salary. When you start your own business, you can put your income potential in your own hands.
There are definitely exceptions to consider for debt-free living. Keep in mind that “good debt” goes hand in hand with having a debt repayment strategy in place.
Certain goals may take longer to achieve
If you do not want to take on any debt, things like getting a mortgage or a college degree will be much more difficult. Saving up many thousands of dollars to buy a home can take decades, especially if you’re paying rent in the meantime.
And if you give up on getting an education or pursuing your business dreams because you have to take out loans, it can work against you later.
You may have a lower credit rating
Essentially, credit is a tool that facilitates the positive use of debt. A good credit score helps you get approved for more loans and better interest rates on them.
If you’re committed to living debt-free, you may not even be take care of your credit score!
But when you really want a high credit score just to keep your future options open, living debt free makes it difficult. Having credit helps build credit as long as you pay it back diligently. If you have no credit and no credit cards, the agencies have essentially no information about you.
6 tips on how to live debt free
So, whether you’re committed to a debt-free lifestyle or living debt-free with one or two exceptions, where do you start? These six suggestions can set you on the right path!
1. Attack any existing debt you have
Before you can live debt free, you must be debt free! Plan a day to sit with the numbers. How much debt do you have?
What interest do you pay? What income do you earn, and is there a way to increase it to pay off your debt faster?
Once you have a complete picture of your financial situation, prioritize and start developing debt reduction strategy.
2. Stick to a budget (with built-in fun)
While you still have the income and debt figures in front of you, try to calculate the remaining expenses. Divide them into non-negotiables and must-haves, and look at your average monthly expenses in each category.
Using this information, look for opportunities to make adjustments and set new target numbers. Don’t forget to factor savings and investments into your budget.
Now a debt free lifestyle will be require sacrifice and a deliberate attitude to spending. But remember, a debt-free lifestyle doesn’t have to be a fun-free lifestyle!
Add an entertainment category to your budget to use for fun experiences, dining, and shopping. Just make sure you have the self-discipline to get rid of yourself when the fun money runs out!
3. Create mutual funds for your goals
The ultimate key to a debt-free life comes down to one thing: save first, spend later. Taking on debt is not an option, so you have to be very disciplined setting goals and saving for them.
One way to deal with this is to create savings “buckets” designed around your goals and expected expenses. They are also called “sinking funds”.
Examples Categories of sinking fund includes transportation (like saving for a new car), medical expenses (important because they can surprise you!), vacations, home repairs, Christmas and birthday gifts, etc.
4. Buy used cars for cash
Cars are one of those big purchases that can require some mental rethinking.
Some people consider them a symbol of success and style. They may frequently upgrade to newer vehicles and compare their vehicles to those driven by friends and neighbors.
Others see cars as a means of getting from point A to point B safely and reliably. As a result, they don’t care much about things like aesthetics, color, or bells and whistles.
The latter perspective makes it much easier to be a debt-free car owner!
If you’re okay with driving an older model from a non-luxury brand, it may not take you long to save up and buy a car with cash. It just won’t have all the latest high-tech features. Use these offers for buying a used car that will keep you on the road for years to come.
5. Don’t carry a balance on your credit cards
Did you know you can still use credit cards without sabotaging your debt-free life? In fact, you probably should! There are many good reasons for this put almost every purchase on a credit card:
- They provide more security (by adding a layer between your purchases and your bank account)
- Purchase protection or insurance is often built-in
- You can get cash back or travel rewards
- Unlike cash, losing or damaging a card is not scary
- They offer robust cost analysis features
- Using them (and paying them on time) will help you build your credit
So, how do you use credit cards without having debt? There are two main methods.
The first option is to pay them off in full each month when your statement closes.
Option two is to log into your account and make an instant payment every time you make a purchase. That way, you will never be in debt even for a single day.
Of course, if you still have credit card debt, stop using the card until it’s gone. And if you don’t trust yourself with credit, you know yourself best, and you can reduce it forever if you want!
6. Weigh renting versus owning
Home ownership is one of the most common examples of “good debt” that people take on. If you want to be a little less rigid about living debt-free, this is a discussion for your family.
Sometimes it makes sense to rent long term, especially if you move frequently. Other times it makes sense to compromise and take an affordable mortgage.
What would your debt-free lifestyle look like?
After all, living debt-free won’t look the same for everyone. No matter how you decide to do it, stay motivated by remembering why you set out on this journey and what you want to achieve.
For a quick motivation boost, read on these 20 inspirational quotes about living debt free. Then learn about steps to take when you finally get out of debt!