In today’s world, it may seem difficult to live debt-free. The possibilities for taking on debt are endless, from credit cards to car loans to student loans. But if you’re committed to living debt-free, it’s definitely doable with the right attitude and a sound plan.
Let’s examine the benefits and drawbacks of living debt-free before diving into some advice for achieving it and leading a debt-free life.
Benefits of living debt free
It’s crucial to understand your motivations before setting any new financial objectives. The same holds true for debt-free living. So let’s start with the advantages of debt-free living.
All your money is your own
In essence, debt is money that has been promised to another party. This means that not all of the money you make is actually yours.
You will mentally subtract “$X for the car, $X for the credit card,” and so forth when you look at your paycheck. Additionally, you will need to subtract from your total net worth.
Everything changes once you stop carrying debt. Every dollar you make is yours and increases your net worth.
Instead of having some of those decisions made for you, you get to choose how to use your money. In a nutshell, it gives you back control!
You don’t have to pay interest
This can be a very beneficial benefit, especially if you have high-interest consumer debt! The double-digit interest rates that many banks impose on credit cards can cause your debt to become out of hand very quickly.
To live a debt-free life, paying off credit card debt should be your first goal.
Interest rates on other types of debt, such as mortgages, auto loans, and student loans, are frequently lower. However, paying any interest over time does increase the cost of items.
You’ve probably heard tales of folks who have paid off their student loans for years, but they still owe the same or even more! The risk of unbridled interest is that.
It teaches you discipline and frugality
Spending patterns and psychology are closely related.
Starting a debt-free lifestyle can completely change your perspective if you have a history of “spend now, worry later” thinking. It forces you to honestly evaluate your requirements, wants, and financial situation.
You might inquire, “Can I now afford this? How much time will I need to save for it? How many hours of work does this amount of money represent, and do I really need it, or should I save it for something more important?
It’s common to experience growing pains when switching from an instant gratification mindset to a delayed gratification mindset. Fortunately, you can learn seven habits that will help you be more disciplined.
You can funnel money into investments instead of debt
This is the ideal opportunity if you’re currently making a lot of debt payments (or you just got out of them). You’re used to surviving each month without that cash!
Act as though you still have to make those debt payments, but this time, use them to your advantage. Boost your emergency money or contribute monthly to a retirement account.
It reduces financial stress
Until you are debt-free, you might not be aware of how much debt is harming your mental health. It can seem like a trap to be in debt.
You could feel as though your options in life are limited. You can be bound to a job you detest by your debt. It might force you to lead a demanding life of living paycheck to paycheck.
There are several methods for reducing debt-related stress, but naturally, getting out of debt and keeping it that way is the best option.
Drawbacks of living a debt free life
It may seem unusual to argue that leading a debt-free life could have drawbacks, but it’s crucial to understand all you’re committing yourself into. Here are a few things to think about.
There is “positive debt”
Most of the time, when individuals discuss “getting out of debt,” they are referring to “bad debt.” That includes debt from credit cards, pricey auto loans, personal loans, etc.
But there is also “good debt.” That refers to the debt you can use strategically.
Top illustrations of constructive debt include:
- your residence or other property
- Loans for education to pursue a rewarding job
- a loan for an entrepreneur’s business
All of these significant expenditures have the potential to benefit rather than harm your financial future. In some circumstances, taking on “good debt” may be a wise decision.
One way to avoid paying rent is to purchase a home. You can also get paid more with a degree. Your ability to earn money might be in your own hands by starting a business.
Debt-free living exceptions are probably worth considering. Keep in mind that having a plan for paying off your debts is essential to having “good debt.”
Certain goals may take longer to reach
Things like securing a mortgage or a college degree will be much harder if you don’t want to incur debt. It can take years or even decades to accumulate the thousands of dollars necessary to buy a home, especially if you’re also paying rent.
Furthermore, if you decide against furthering your education or pursuing your business goals because you would need to take out loans, it can come back to haunt you.
You may have a lower credit score
In essence, credit is a tool that makes it simpler to positively leverage debt. You can get more loans approved and at better interest rates with a good credit score.
Your credit score may not even matter to you if you’re committed to living debt-free!
However, debt-free living makes it difficult if you do want a high credit score just to keep your options open in the future. As long as you diligently repay your loans, having loans helps you improve credit. The agencies essentially know nothing about you if you don’t have any loans or credit cards.
6 Tips for living debt free
So where do you begin, whether you’re determined to live a debt-free lifestyle entirely or with one or two exceptions? You can start off right by following these six recommendations!
1. Attack any existing debt you have
You must become debt-free before you can begin to live debt-free! Set aside a day to work with the numbers. What sum of debt do you owe?
What rates of interest do you pay? How much money do you make, and is there a way to make more to accelerate debt repayment?
Set priorities and start developing your debt-reduction strategy once you have a complete understanding of your financial situation.
2. Follow a budget (with fun built-in)
Try to estimate the remaining costs while you still have your income and debt figures in front of you. Consider categorising them into nice-to-have versus necessary expenses, and then calculate your average monthly spending in each category.
Utilize this data to identify areas where changes can be made and new goals can be established. Don’t forget to include investments and savings in your budget as well.
Now, living debt-free will demand making sacrifices and being deliberate with your spending. But keep in mind that living debt-free doesn’t have to be a life without enjoyment!
Create a budget category for entertainment to be used for enjoyable activities, fancy meals, and “want” purchases. Just make sure you have the self-control to stop when the money for fun runs out!
3. Create sinking funds for your goals
Saving first and spending later is the one true secret to living debt-free. You have to be very disciplined about setting goals and saving for them because taking on debt is not an option.
Setting up savings “buckets” for your objectives and anticipated expenses is one way to handle this. Additionally known as “sinking funds,” these.
Transportation (like saving for a new car), medical expenses (important because they can come as a surprise!), vacation, home repairs, Christmas and birthday gifts, etc. are a few examples of sinking fund categories.
4. Buy used cars in cash
One of those significant expenditures that may call for some mental adjustment is buying a car.
They represent success and style to certain people. They can compare their cars to those driven by their friends and neighbours and frequently upgrade to newer models.
Others see automobiles as a dependable and safe way to go from point A to point B. They consequently place less value on elements like beauty, colour, and bells and whistles.
Being a car owner with no debt is much simpler from the latter viewpoint!
It might not take so long to accumulate enough money and purchase a car with cash if you’re comfortable with driving an older model from a non-luxury brand. Just the latest high-tech features won’t be present. Use the advice in this article to purchase a used car that will keep you on the road for many years.
5. Don’t carry a balance on credit cards
Did you realise that using credit cards is still possible without jeopardising your goal of living debt-free? In fact, you should most likely! There are numerous convincing arguments for charging practically all purchases to credit cards:
- They provide increased safety (by adding a layer between your purchases and bank account)
- There is frequently built-in purchase protection or insurance.
- You may receive cashback or travel benefits.
- It’s not a major concern if a card is lost or damaged, unlike cash.
- They provide effective spending analysis tools.
- Utilizing them and making on-time payments permits you to develop credit.
What is the best way to utilise credit cards without accruing debt? There are two primary approaches.
The first choice is to pay them off completely each month at statement closing.
The second choice is to sign into your account each time you make a transaction and make an immediate payment. In this manner, you never carry debt for even a single day.
Of course, you should stop using your cards if you still owe money on them until it is paid off. You know yourself best and can break them up for good if you want to if you don’t trust yourself with credit.
6. Weigh renting vs owning
One of the most prevalent forms of “good debt” that people take on is mortgage debt. This is a talk that your family should have if you’re willing to relax some of your strict debt-free living rules.
Long-term rentals can be advantageous in certain situations, particularly if you move around a lot. Sometimes it makes sense to make a concession and get a mortgage that’s within your budget.
You may compare the benefits and drawbacks of each choice here or by using a rent vs. buy calculator.
What will your debt free lifestyle look like?
Living a debt-free existence won’t ultimately look the same for everyone. Keep yourself motivated by keeping in mind why you’re on this trip and what you want to achieve, regardless of the approach you take.
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