Living debt free in today’s world can sound like a tough proposition. From student loans to credit cards to car notes, the opportunities to take on debt are endless. But if you’re committed to a debt free lifestyle, it’s certainly possible with the right mindset and a solid strategy.
Let’s check out the good and bad of debt free living, then dive into some tips for making it happen and living a debt free life!
Benefits of living debt free
Before setting any new financial goals, it’s always important to have a good grasp on your reasons for doing so. The same applies to living debt free. So let’s start with the benefits of living debt free!
All your money is your own
Debt is essentially money that’s been promised to someone else. That means not all of the money you earn really belongs to you.
When you look at your paycheck, you’ll be mentally deducting “$X for the car, $X for the credit card,” and so on. And when you add up your net worth, you’ll have to do some subtraction too.
That all changes when you’re living debt free. Every cent you earn belongs to you and adds to your net worth.
You get to 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’re dealing with high-interest consumer debt, this can be a very profitable benefit! Many banks charge double-digit interest on credit cards, which can quickly make your debt spiral out of control.
That’s why paying off credit card debt should be priority #1 on your way to debt free living.
Other kinds of debt—like student loans, mortgages, and car loans—often have lower interest rates. However, paying any interest does make purchases more expensive over time.
You’ve probably heard stories of people who’ve been paying their student loans for years and still owe the same amount or more! That’s the danger of runaway interest.
It teaches you discipline and frugality
Spending habits are intimately connected to psychology.
If you’ve historically had a “spend now, worry about it later” mindset, embarking on a debt free lifestyle is going to totally flip that around. It makes you really take inventory of your needs, wants, and financial realities.
You may ask questions like, “Can I afford this right now? How long will it take me to save for it? Do I truly need this, or should I keep the money for a larger goal, and how many hours of work does this money represent?”
When changing your mindset from instant gratification to delayed gratification, it’s normal to have some growing pains. Fortunately, there are seven habits to improve self-discipline that you can learn.
You can funnel money into investments instead of debt
If you have a lot of debt payments right now (or you’re freshly free of them), this is a perfect opportunity. You’re already familiar with living without that money every month!
Pretend that you still have those debt payments, but use them to your advantage this time. Make a monthly contribution to a retirement account, or pad your emergency fund.
It reduces financial stress
You may not realize how much debt is affecting your mental health until you’re free of it. Being in debt can feel like a trap.
You might feel limited in the kinds of life choices you can make. Your debt could handcuff you to a job you hate. It could put you in a stressful paycheck-to-paycheck lifestyle.
There are plenty of strategies for managing debt stress, but of course, there’s no better way than getting debt free and staying that way.
Drawbacks of living a debt free life
It might sound strange to say that there could be negatives to living a debt free life, but it’s important to have a full picture of what you’re getting yourself into! Here are some things to consider.
There is “positive debt”
When people talk about “getting out of debt,” they’re mostly talking about “bad debt.” That means credit card debt, expensive car loans, personal loans, etc.
But there is “good debt,” too. That refers to the debt you can leverage to your advantage.
Some top examples of good debt include:
- Your home/other real estate
- Education loans to train for a good career
- A business loan for an entrepreneur
These are all big expenses that can improve your financial future instead of harming it. Taking on “good debt” can actually be a wise choice in some cases.
For instance, buying a home can save you rent. A degree can also help you earn a higher salary. Starting a business can put your income potential in your own hands.
It’s certainly worth weighing exceptions to living debt free. Keep in mind that "good debt" goes hand in hand with having a strategy to pay off the debt.
Certain goals may take longer to reach
If you don’t want to take on any debt, things like getting a mortgage or college degree will be a lot tougher. Saving up many thousands of dollars to buy a home could take decades, especially if you’re paying rent in the meantime.
And if you forgo getting an education or pursuing your business dreams because you’d have to take out loans, it could work against you later.
You may have a lower credit score
Credit is essentially a tool that makes it easier to leverage debt positively. A good credit score helps you get approved for more loans and get better interest rates on them.
If you’re committed to living a debt free life, you might not even care about your credit score!
But if you do want a high credit score just to keep your future options open, debt free living makes it tough. Having loans helps build credit, as long as you pay them off diligently. If you have no loans and no credit cards, the agencies essentially have no information about you.
6 Tips for living debt free
So, whether you’re committed to a fully debt free lifestyle, or living debt free with one or two exceptions, where do you start? These six suggestions can put you on the correct path!
1. Attack any existing debt you have
Before you can start living debt free, you have to get debt free! Plan a day to sit down with the numbers. How much debt do you have?
What interest rates are you paying? How much income are you earning, and is there a way to increase that to speed debt payoff?
Once you have a whole picture of your financial situation, set priorities and begin crafting your debt reduction strategy.
2. Follow a budget (with fun built-in)
While you still have your income and debt numbers in front of you, take a crack at calculating the rest of your expenses. Divide them into non-negotiable expenses vs nice-to-haves, and look at your average monthly spending in each category.
Using this information, look for opportunities to make adjustments and set new target numbers. Don’t forget to build savings and investments into your budget too.
Now, a debt free lifestyle will require making sacrifices and being intentional about your spending. But remember, a debt free lifestyle doesn’t have to be a no-fun lifestyle!
Add an entertainment category to your budget to use on fun experiences, dinner out, and “wants” purchases. Just ensure you have the self-discipline to cut yourself off when the fun money is gone!
3. Create sinking funds for your goals
The ultimate key to living debt free comes down to one thing: save first, spend later. Taking on debt isn’t an option, so you have to be very disciplined about setting goals and saving for them.
One way to handle this is to set up savings “buckets” dedicated to your goals and anticipated expenses. These are also called “sinking funds.”
Examples of sinking fund categories include transportation (like saving for a new car), medical expenses (important since these can surprise you!), vacation, home repairs, Christmas and birthday gifts, etc.
4. Buy used cars in cash
Cars are one of those big purchases that may require some mental reframing.
Some people view them as a symbol of success and style. They might frequently upgrade to newer cars and compare their vehicles to what friends and neighbors drive.
Others view cars as a means to get from point A to point B, safely and reliably.As a result, they don't put as much stock in things like aesthetics, color, or bells and whistles.
The latter perspective makes it a lot simpler to be a debt-free car owner!
If you’re okay with driving an older model from a non-luxury brand, it might not take that long to save up and buy a car in cash. It just won’t have all the latest high-tech features. Use these suggestions for buying a used car that will keep you on the road for years to come.
5. Don’t carry a balance on credit cards
Did you know you can still use credit cards without sabotaging your debt free living? In fact, you probably should! There are many compelling reasons to put almost every purchase on a credit card:
- They offer more security (by adding a layer between your purchases and bank account)
- Purchase protection or insurance is often built-in
- You can get cash back or travel rewards
- Unlike cash, it’s not a big deal if a card gets lost or damaged
- They offer robust spending analysis features
- Using them (and paying them on time) helps you build credit
So, how do you use credit cards without having credit card debt? There are two basic methods.
Option one is to pay them off in full each month when your statement closes.
Option two is to log into your account and make an immediate payment each time you make a purchase.That way, you're never carrying debt for even one day.
Of course, if you still have credit card debt, stop using your cards until it’s gone. And if you don’t trust yourself around credit, you know yourself best, and you can cut them up for good if you want to!
6. Weigh renting vs owning
Homeownership is one of the most common examples of “good debt” people take on. If you’re open to being a little less rigid about living debt free, this is a discussion your household should have.
Sometimes, it does make sense to rent long-term, especially if you move frequently. Other times, it makes sense to compromise and take on an affordable mortgage.
Find out the pros and cons of each option here, or use a rent vs buy calculator to crunch the numbers.
What will your debt free lifestyle look like?
Ultimately, living a debt free life won’t look the same for everybody. No matter how you choose to go about it, stay motivated by remembering why you’re on this journey and what you want to accomplish.
For a quick motivation boost right now, go read through these 20 inspirational quotes about debt free living. Then, learn about steps to take once you’re finally debt free!
