For many Americans, screaming, “We’re Debt-Free!” and ultimately living a life without financial stress seems somewhat impossible. The messaging on the internet, social media, news, and even within homes promotes a culture of buying now and paying later.
The consumer system is set up so that most purchases depend on applicant creditworthiness and a focus on being in debt responsibly. A high credit score will get you lower interest rates on major purchases, and a low credit score is a cause for worry because of higher interest rates. Many people also struggle to build their credit, and they must be careful about which personal finance decisions impact credit scores.
The average American builds credit by opening a credit card account, acquiring student loan debt, or making car payments. Many people also live paycheck to paycheck, making it difficult to avoid applying for loans if they urgently need money.
The availability of easy to obtain high-interest credit options results in many people incurring debt over their lifetimes, which, if not managed, can result in being overwhelmed with thousands of dollars in debt. Many Americans are also not financially literate, increasing their chances of landing debt options with high-interest rates and longer terms of payment. All these factors could result in living an undesirable life of debt.
My Debt-Free Life Started Late In My Adult Life
After buckling down for about seven years, my wife and I were able to pay off our home mortgage, vehicle loans, credit card debt, recover from a prior-forclosure, and set us up to retire with over a million dollars in my employer-sponsored retirement fund. We did this by hitting rock bottom by living a “normal life” and realized we were tired of living paycheck to paycheck.
To change our lives so we could eventually say, “we’re debt-free” required several tactics:
- Significantly reduced living expenses
- Sold unused household items
- Increased income through multiple sources
- Focused on reducing credit card debt
- Built an emergency fund
- Sold our expensive vehicles with high car payments
- Ignored social media
- Established financial goals, together
- Made the minimum payment on all our debts except the one we were trying to pay off
- Put financial independence at the front of our goals and dreams
- Delayed most major purchases that were not needed
- Improved our relationship with money
- Used a monthly budget religiously
- Started investing in my employer-sponsored retirement plan
We quickly found out that no personal finance class, debt-free scream, or expensive Total Money Makeover book would be the cureall for our debt disease. To become debt-free people, we needed to take on a different mindset of what we wanted in our lives and be stubborn enough to achieve it.
How Do People End Up In Debt? (Like We Did)
While living in debt is not the end of the world, paying off your debt and living a debt-free life opens many options to a more fulfilling and peaceful life. However, debt is unavoidable for some people since they are stuck in socioeconomic situations beyond their control. On the other hand, most of the factors that lead people into debt revolve around their environment and mindsets.
Social Media And The Need To Impress
Social media’s influence can easily create the illusion that material possessions are a source of success and happiness. For example, when your friend posts about their brand-new Mercedes on Facebook, you might feel compelled to buy a new luxury car to stay current, too.
After all, you probably earn around the same income as your friend, and a new car would not hurt your finances. You convince yourself you can always pay off the car over a few years.
This mindset could lead you down a path of unnecessary debt. You might not have a complete understanding of your friend’s financial situation, and making a purchase, you did not plan for could set your finances back and put you in even more debt.
A similar pressure could be the need to conform to the social environment around you. If most of your work colleagues are buying houses in fancy neighborhoods, you might feel compelled to join the bandwagon so you can fit in. This could also lead to unplanned and unnecessary debt.
The world of consumer advertising also influences impulsive purchases that lead people to more debt. For example, many car dealerships advertise very low-interest rates and zero down on new car purchases. Someone looking to buy a new car might find this to be a great deal.
However, this is often not the case, as it is only consumers with higher credit scores who can qualify for the low-interest rates. The zero dollars down often means that the interest rate on the auto loan will be high over the course of the loan term, resulting in more debt over time.
Limited Financial Literacy
Being financially literate is important because it allows you to make better financial decisions regarding purchases, investments, and future financial planning. Unfortunately, the teaching of financial literacy related to personal finance is not emphasized in many schools, and most people do not have access to financial literacy classes throughout their lifetime.
The average American has about $10,000 in credit card debt, with a large percentage of this amount resulting from accrued interest. With a limited understanding of how credit cards work, many people end up paying more interest than they should over the term of their credit card.
Most people also do not know much about retirement saving and investment options and eventually reach retirement age with few savings. Additionally, many individuals and families do not have emergency funds to cater for unexpected expenses or loss of job income.
14 Ways You Can Also Live A Debt Free Life
Even with all the above-mentioned difficulties, it is possible to live a debt-free life. Depending on how much debt you have, reaching your financial goals is a process that takes significant dedication, focus, and hard work.
It is important you set specific goals that are both realistic and manageable. This will prevent you from getting overwhelmed by your debt or easily getting distracted during the debt payment process.
Here are some ways you can work towards living a debt-free life:
1. Organize Your Finances
It is important to organize your finances because they play a big role in determining how fast you can live a debt-free life. The chances are that you will probably have to make decisions about spending or saving every day. Below are some important ways to organize your finances.
2. Budget For Monthly Expenses
Budgeting your monthly income and expenses helps to plan your debt-free journey in an organized and goal-oriented way. A good budgeting system should be based on your monthly income, so your expenses do not exceed your income.
3. Separate Fixed And Variable Expenses
It helps to separate your expenses into fixed and variable expenses. Fixed expenses are typically those you cannot forego, such as rent and utility bills, while variable expenses are those that you could adjust monthly, as necessary.
4. Prioritize Debt Pay Off
When planning your budget, you must factor in how long it will take to make payments on your various debts. One of the proven strategies to systematically reduce your debt over time is Dave Ramsey’s popular debt snowball method.
With debt snowballing, you can plan to pay off debts such as credit cards by starting with the smallest payment, regardless of interest rate, and work your way up to the largest debt. As you pay off the smallest debts, you continue making the minimum payment on the larger debts.
This method is practical and effective because once you have paid off your smallest debt, the amount you previously budgeted for this debt can be allocated to the next larger debt. As you work towards the larger debts, you have more money budgeted each month to pay off larger portions of these debts until all your debts are fully paid.
5. Use A Cash Envelope System
You can also use systems like the cash envelope system, in which you categorize expenses into different envelopes. Instead of using a credit card to pay for these expenses, you put the budgeted amount of cash into envelopes corresponding to specific expenses at the beginning of every month.
Cash limits your spending on each expense to just the amount of cash available in its corresponding envelope, preventing you from overspending on purchases.
6. Reduce Or Eliminate Monthly Subscriptions
Monthly subscriptions for streaming services such as Netflix, Hulu, or Spotify can also unknowingly take up a portion of your expenses that could be used in paying down debt. For example, the cost of a standard Hulu subscription is $5.99 monthly, and that of Netflix is $13.99 monthly.
While it does not seem like much, it is approximately $20 monthly and $240 annually, amounts that could easily have been used to pay off one of your debts. If you do not happen to watch shows or movies frequently, this could be an expense you could sacrifice for the period of your debt-free journey.
It is also important to review your current subscriptions to periodicals and services to ensure you are actually using what you pay for. For example, it might not be feasible to keep an Amazon Prime subscription that costs $12.99 monthly or $119 annually if you only order packages from Amazon once or twice a year.
7. Have An Accountability Partner
It also helps to have someone with whom to go through the debt-free journey so that you can remain accountable together. For couples, both partners can be accountability partners, celebrating small wins together, and encouraging each other when the process feels overwhelming. Having someone to whom you are accountable for your debt-free journey also keeps you on track to make payments on time each month.
8. Reduce Debt On Major Purchases
For most Americans, most of their debt comes from major purchases such as cars and mortgage payments. It helps to pay off the loans for these purchases as quickly as possible to minimize the loan term’s accruing interest.
Here are a few ways to reduce the amount owed on debts from major purchases.
9. Pay Off Your Mortgage Early
Although mortgage lenders offer mortgages ranging from 15 to 30 years, you are better off taking out a shorter mortgage and paying it off as fast as you can. A 15-year mortgage will reduce the amount of interest you pay for the loan by tens of thousands of dollars. When planning to buy a house, you should take some time to research houses that would fit your income and budget.
Before applying for a home mortgage, saving up a large down payment is necessary to reduce the amount of mortgage interest you end up paying. Making a down payment lower than 20% of the mortgage also means that you would apply for private mortgage insurance, which can increase your monthly payments over the course of the mortgage.
Therefore, even though owning your own home is the American Dream, it is in your best interest to save as much as possible for a large down payment on a house you can afford. If you happen to have a 30-year mortgage already in place, you could consider refinancing to a shorter-term mortgage to avoid paying a lot more in interest over time.
10. Make Smart Decisions About Car Purchases
While it is tempting to buy a nice-looking new car because your current car is getting old or has a few issues, you should consider how expensive car loans will impact your debt situation over time.
Rather than purchasing a new car, you could consider investing in a used car in good condition. If your transportation needs are as simple as commuting or running errands, it is more feasible to make lower payments on a cheap car as you pay off as much of your debt as possible.
If your car is still in good condition and requires minimal repair work, it might be worthwhile to focus on performing these repairs rather than trading it in for a new one. However, if the cost of repairs is much higher than you can afford and is about the same as buying another car, you could consider cheap options for a vehicle purchase.
Depending on your location relative to your workplace, you could also consider selling off your car and using public transportation as you pay off your debt. You could put the money from the car sale towards paying down more debt. The chances are that public transportation might even be cheaper than the costs of gas and vehicle maintenance.
11. Increase Your Cash Flow And Sources Of Income
While all the above strategies can help reduce your debt, increasing your income will boost your debt-free journey. Even after bringing down your expenses to a manageable level, maintaining the same amount of income each month will only allow you to pay off a certain chunk of debt. You can make significant reductions to your debt using some of the below methods.
12. Work Multiple Jobs, For A While
In addition to your daytime job, finding another job to work either evenings or weekends can provide extra income to pay off debt. There are multiple options for part-time or weekend jobs that could include delivering meals, working at a local store, or working at a restaurant.
13. Find A Part-Time Gig To Boost Your Income
If you have a certain talent or skill or are very experienced in a trade, you could also do part-time gigs to make extra income on the side. Since we live in a digital age, there are many options to make extra money online on a part-time basis.
The other benefit of focusing on a part-time gig is that it can help you develop your skills or talents and increase the chances of this gig, turning into a full-fledged business. As a business owner, you could also qualify for certain tax breaks that could eventually save you more.
14. Spend Your Tax Return To Pay Down Debt
I know it sounds unAmerican, but using your tax return on something other than a vacation or a new toy may be the best move. Depending on the size of your tax return, you may be able to eliminate a good portion of your outstanding credit card payments.
Living Debt Free Is Worth It And Will Change Your Life
Paying off all your debt allows you to focus more on other aspects of your life and gives you peace of mind regarding your financial freedom. Here are some of the benefits of living debt-free.
It Allows You to Invest In Your Financial Future
Once you have all your debts paid off, you can comfortably make various investments. For example, if you contributed a small percentage to your 401(k) account, you could even increase the contribution per paycheck and increase the compound value of your retirement savings. This can especially be beneficial if your employer matches your 401(k).
A debt-free life also gives you the peace of mind to invest in real estate properties of your choosing. This can be a valuable investment because the value of real estate usually appreciates over time. You could also invest in the stock market and buy shares in various companies of your choosing, without the worry of debt wearing you down.
Debt-Free College Degree For Your Children Is Possible
Living debt-free also gives you the option to invest in your children’s future by investing in a trust fund or college fund. This provides peace of mind that your investment decisions secure your children’s financial future. You can also invest more money in a life insurance policy, leaving your children with a secure future in the unlikely event of your demise.
Besides, debt-free living can help you pay cash for a community college plan to set your kids up with a normal life free of student debt. If your kids don’t get scholarships, a great debt-free college plan is to send your kids to two years of community college to get their pre-requisites for much less than a University. After completing the prereqs, they can complete the last two years at the University.
I wrote this article about how to send your kids to college even if you have no money saved.
By teaching your children how to avoid student loan payments, you will improve their relationship with money so they too can be debt-free people much earlier than you were.
Start A Small Business Built Around Your Passions
Without the worry of debt, you can spend more time focusing on growing a business idea. You also have more capacity to save capital to start a business you might be passionate about. Paying off debt and living debt-free can also allow you to save up enough money to quit your job and focus on scaling up your business.
You Can Spend More Time with Family
For younger families, being completely debt-free can allow one partner to stay at home to focus on raising children while the other partner focuses on bringing home an income. This prevents the stress that might come with balancing work and family responsibilities while also struggling with a load of expenses.
If You Want To Scream, “We’re Debt-Free!” In this Life Time, It Is Possible
Although the debt-free journey to financial independence is different for everyone, with a lot of hard work, effort, and perseverance, it’s possible and worth it in the end. It all starts with setting manageable personal finance goals and staying the course until you achieve them.