One of the undeniable proof of financial freedom is living a debt-free life.
A few years ago, I was opportune to counsel a young couple struggling to pay off $300,000 in student loans. Paying down this huge debt successfully was their top priority at the time since it would give them the freedom to gain full control of their finances. They simply wanted to learn how to live a debt free life, and that’s a very valid financial goal to have.
Clearing your outstanding debts is one thing you must try to accomplish long before your retirement. Living debt-free would enable you to utilize your financial resources without any major restraint.
Thankfully, you are in luck today! I’ll be sharing some of the best-known practical tips that can help you pay off your debts faster and attain financial freedom. So, sit back and relax as we carefully dissect this insightful piece of information.
What Does It Really Mean To Live A Debt-Free Life?
To live a debt-free life means to have no debts at all. It means you aren’t paying any personal loans, credit cards, auto loans, student debt, or mortgages. This is a major aspect of financial freedom that everyone should desire.
4 Benefits Of Living A Debt-Free Life
If you ever feel it’s normal to keep making monthly debt payments, it’s time to have a rethink. Here are some amazing benefits of living without debt:
1. Living A Debt-Free Life Keeps More Money In Your Pocket
This has to be one of the most obvious reasons why anyone should try to attain a debt-free life. The interest charges you pay on debts can be sometimes difficult to fulfill, especially when your monthly income isn’t enough. Besides, in a situation where you fail to make certain payments, you would be charged with late fees.
Being in debt has a way of constantly reducing your income and spending power. It’s like having a significant amount of your money seized, preventing you from reaching your financial goals. Basically, as soon as you become debt-free, you will have full access to your income.
2. Living A Debt-Free Life Brings More Financial Security
One of the benefits of living debt free is financial freedom. When you stop paying debts, you can use your income to build a safety net. For example, you would be able to contribute to an emergency fund, pay for insurance, and even make good investments.
A life without debt frees up cash in your monthly budget and allows you to take advantage of great financial opportunities.
3. Living A Debt-Free Life Reduces Stress And Anxiety
The thought of paying down debt every month can be stressful, leading to anxiety and other emotional issues.
Research by the Money and Mental Health Policy Institute has confirmed that 46% of people in debt suffer from mental health problems. The earlier you pay off debt and become free, the easier it is to avoid mental stress.
Living debt-free will help you retain your peace of mind and stop worrying about money.
4. Living A Debt-Free Life Helps You Retire Early
Retirement is inevitable as long as you’re alive. What this means is that irrespective of what your financial situation currently looks like, you have to start planning for when you will eventually retire.
Aside from building a 401(k) account, you could also invest in other reliable options to be on the safe side. However, these things won’t be possible if you are constantly struggling to pay off debt.
As much as attaining a debt-free life is difficult, you have to do everything within your means to make it happen. It would be impossible or extremely difficult to retire successfully if you don’t know how to live a debt free life.
Drawbacks Of Living A Debt Free Life
We have been assessing some reasons why living without debt is great. But interestingly, there are still a few drawbacks to being debt-free. Here’s what you should keep in mind:
1. Living A Debt-Free Life Can Affect Your Credit Score Negatively
Some time ago, I was speaking with a hip-hop artist when he said he never buys a car in cash. He has multiple cars but never purchased anyone outright. Of course, he’s a rich man. But he did this to build his credit score.
Bear in mind that 35% of your score is made up of your payment history. This means if you live without debt most of your life, you won’t have a healthy credit history. When your credit score is assessed, there won’t be any evidence that you are financially stable.
Hence, even if you know how to live a debt free life, you could deliberately incur a considerable amount of debt you can handle and pay off on time. It will improve your credit history.
2. Living A Debt-Free Life Could Make You Forfeit Opportunities
It’s better to be debt-free than to have your finances tied down to debt. Notwithstanding, incurring debt is necessary to accomplish certain financial goals.
For example, millions of families have been able to get their own homes by taking a mortgage. Young people are attending colleges and getting their degrees by applying for student loans. This means you may not completely have to ignore debt.
However, it’s important to make sure that whatever you borrow is within your means. Don’t ever borrow what you can’t afford to repay.
10 Steps To Live A Debt Free Life
Do you want to be out of debt and have a stable financial situation? If you do, here are the recommended steps to live a debt free life:
1. Commit To Self-Reflection
Getting out of debt is one thing while avoiding debt is a different ball game.
Some people are often tempted to pile up debt again after becoming debt-free. There are several reasons for this, one of which is the inability to assess their emotions and build a level of self-discipline.
It is important that you reflect on your past mistakes and carefully analyze all the things you didn’t do right with your finances. This is the first step to paying down debt and remaining debt-free.
Ask yourself all the necessary questions. Were you careless with your credit cards? Did you make big purchases without planning? Is your rent or mortgage more than you can handle? You must learn to be true to yourself and set realistic goals. Failing to observe this rule can take you back to square one.
2. Prioritize Your Essentials
Being in debt does not always mean you spend uncontrollably or can’t manage your income. In some cases, debt is almost unavoidable. Nevertheless, one of the major steps to help you live a debt free life is placing your needs above your wants.
Would you rather get a car loan or stick with the old truck you’ve had since college? If you are desperate enough to remain debt-free, you must realize how important it is to spend only on your essentials. It’s all about controlling your spending habits, so you have enough money to pay your debt faster.
3. Build Savings
If you must learn how to live a debt free life, saving money should also become a priority.
You have to start exploring different ways to save money every month. You can begin by canceling irrelevant subscriptions like gym memberships and streaming services.
You can also avoid eating out since it costs a lot of money. Preparing your own meals at home is much cheaper and even healthier. Create a meal plan to help remain consistent.
By adopting and practicing these better money habits, you would generate extra money that can be put toward paying down your debt faster.
4. Budget Money
There’s no way we can take this out of the plan. Building a monthly budget is one of the primary tips for adopting a debt free lifestyle. It’s quite important because that’s how you begin to manage your income efficiently.
You need to be able to allocate the right amount of money to every spending category in the budget such as transportation, food, utilities, insurance, rent, childcare, and of course, debt payments.
All irrelevant expenses should be canceled. Ideally, your budget is supposed to cater to your essentials. This will help you focus on paying off your debt as soon as possible. Besides, if you need assistance with building a budget, you should check out this post that examines the 5-step process to budget money.
5. Stick To Your Budget
Building a budget isn’t where you stop. You must also ensure you stick to the budget. That is spending within the limit your budget creates.
One of the ways to do this is by using a budgeting app. There are a bunch of helpful mobile apps such as Mint and You Need A Budget (YNAB) that will budget your income and help you get back on track with your finances.
From syncing your bank accounts to setting reminders for timely payments, there are several things these apps do to help you stick to your budget.
Need help sticking to your budget? Check out these 13 tips that make sticking to your budget much easier.
6. Choose A Reliable Payoff Method
One of the most important aspects of figuring out how to live a debt free life is choosing the right payoff method. Although there are several methods for paying down debt, I usually recommend two strategies: the debt avalanche and the debt snowball.
The former works by helping you focus on paying off your highest-interest debt before any other balance. This doesn’t mean you won’t be making monthly payments toward other debts as well. However, the highest-interest rate debt would be your primary focus.
The other payoff strategy, the debt snowball, works by paying down debts in order of the smallest to the largest. This helps you to get rid of debt quicker and it encourages you to be consistent with the payment process.
Both the debt avalanche and the debt snowball have their benefits. It’s your choice to examine them and decide which one suits your debt situation.
7. Make Extra Payments
One of the fastest ways to live a debt free life is by making extra payments toward your debt balance. This means you should consider paying more than the minimum. Of course, this would be quite difficult since you probably don’t have so much money at your disposal. But it definitely speeds up your repayment plan.
For example, if you are using the debt avalanche method, the extra payments can go toward the highest-interest debt. Within a reasonable amount of time, you would have cleared that balance and moved to the next one with the highest interest rate.
8. Build An Emergency Fund
You would be tempted to use credit cards when things get tight. You may even go as far as taking a personal loan. This is why you need to build an emergency fund to support your finances when you’re desperate for money.
You could lose your job or get into an accident that leaves you without employment for weeks or months. How would you cope in such a situation?
Having an account where you save money for a rainy day is very important. Instead of resorting to debt, you would turn to your emergency fund. This is one of the top tips for a debt-free life.
9. Increase Your Income
Knowing how to live a debt free life could be futile if you aren’t earning enough money. I’m not implying that you must earn 6 figures yearly. However, make sure your income is enough to pay for your bills and make your monthly debt payments conveniently. You can start venturing into different money-making opportunities to boost your income.
Aside from getting a second job or side business, there are several other things you can do to earn extra money. For example, affiliate marketing and dropshipping are helping thousands of people make money every month. You can explore these online-based businesses to improve your financial situation.
Want to learn about how to increase your income? Here are 15 legit ways to make extra money right now.
10. Pay Attention To Your Credit
Have you heard of debt consolidation? It’s another reliable strategy to pay off debt.
However, you can’t qualify for debt consolidation if you have a poor credit score. Your credit history must be impressive enough to indicate that you are eligible to consolidate your debts. Hence, part of learning how to live a debt free life is monitoring your credit regularly.
Try to make payments on time and also look for errors in your credit reports. If you later have to resort to debt consolidation, only a good credit score would be your saving grace.
By the way, if you want to learn how to increase your credit score quickly, here are 10 tips to improve your credit score fast.
Recap: How To Live A Debt-Free Life
Living debt-free actually means you aren’t owing any financial institution or individual a single dollar. Aside from the financial freedom that comes with this, you would also enjoy peace of mind. It’s priceless.
However, the steps on how to live a debt-free life can be challenging to follow, especially if you are more concerned about getting instantaneous results. As you proceed with these debt-free living tips, try to be more focused on the end result than the present situation. Otherwise, you will lose the self-motivation to become debt-free.
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