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For many people, living a debt-free life is a goal that equals financial freedom — thriving, not just surviving. All forms of debt, including student loans, car loans, credit cards and medical debt, can be stressful, regardless of why you borrowed in the first place.
But not all debt is bad. Low-interest debt that helps you increase your net worth, such as a mortgage, may be considered good debt.
Getting and staying debt-free can relieve stress and free up more of your money. Here’s what you should know about getting there.
1. Living debt-free means different things to different people
For some, a “debt-free” life means having no debt at all, or no debt except the mortgage. For others, it means eliminating all bad debt — like payday loans and high-interest credit cards.
“If living a debt-free life is your goal, the first step is defining what that actually means for you,” says Tanner Merritt, a certified financial planner in Jacksonville, Florida. “Once you know what ‘debt-free’ means to you, that’s when planning comes in.”
2. You’ll have to do some math
Before figuring out your approach to living without debt, you must know exactly how much debt you have. Understanding your debt-to-income ratio will help you better weigh your options for tackling debt.
“Get brutally honest about your cash flow,” says Patrick Huey, a CFP in Naples, Florida. “You need to know exactly what’s coming in and what’s going out — no guesswork.”
3. There are lots of ways to approach getting rid of debt
There are several debt payoff methods to consider as you work toward being debt-free.
Debt snowball: You prioritize paying off your lowest balance while paying the minimum on all other accounts. Once you get rid of the lowest balance, you add the amount you were paying to the minimum payment on the next highest debt amount — and your payment amount grows like a snowball as you knock off debts.
Debt avalanche: You prioritize the debt with the highest interest rate while paying the minimum on other debt. Then you move on to the next highest interest rate once the debt with the highest interest rate is paid off.
Debt consolidation: You roll all high-interest debt into one monthly payment at a lower interest rate. Consolidating your debt may shorten the time it takes to pay it off and make payments more manageable.
Debt relief: Debt relief can help ease your financial burden by changing the terms or the amount of your debt. You should explore debt relief if paying off your unsecured debt, such as personal loans and medical bills, within five years isn't possible or if the total amount of your unsecured debt is 50% of your total income or more.
Debt relief options include:
4. You may need to change your mindset
Living debt-free may require you to shift your priorities and change your spending patterns.
Debt-free clients, Huey says, are “deeply committed to delayed gratification — willing to wait for a purchase until they have the cash, and comfortable not chasing every lifestyle upgrade or fleeting opportunity.”
In other words, you must understand your financial limits and be willing to live within them.
If you aren’t already budgeting, getting into the habit of tracking your money is always a good financial move. And finding a budgeting system can help you maintain a debt-free life. Try zero-based budgeting, the 50/30/20 method, or the envelope system.
You can also use budgeting apps that automate the process and even find ways to budget that speak to your unique needs and abilities.
5. An emergency fund is key
One way to stay out of debt is to make sure you have an emergency cash cushion of three to six months' worth of living expenses so you can handle an unexpected expense.
Even if you can only manage to put away small amounts at first, over time you’ll make progress toward your goal.
Some ways to build emergency savings include:
- Setting an attainable monthly savings goal instead of aiming to save one large amount.
- Automating your money so that funds are deposited into savings at the same time each paycheck.
- Using savings-focused apps to help you slowly get into the habit of saving money.
6. Sometimes it makes more sense to keep the debt
Financial planners sometimes advise clients to hold on to low-interest debt if their money can be earning more elsewhere. For instance, if you’ve got a mortgage at 3%, it may be less advisable to aggressively pay it off versus investing your extra cash somewhere where it could earn a higher return.
“I wouldn’t encourage [clients] to take big piles of money and throw it at a home to pay off a mortgage,” says Michael Chadwick, a CFP in Canton, Connecticut. “That’s just a poor use of your capital. As long as you’re making more than you’re paying, keep it.”
And while credit card debt isn’t advisable, using your credit cards and paying them off each month — provided you can spend within your means — has its advantages.
“If you cut out credit cards altogether, you’ll miss out on valuable consumer protections,” Merritt says. “With a card, you can dispute a fraudulent charge without money leaving your bank account, which isn’t the case with a debit card.”
All that said, if your ultimate goal is owing nothing at all, that’s your choice, and you can certainly get it done.
“Debt-free living is a lifestyle, and not always the optimal financial choice for all,” Huey says. “But it’s a fine goal for those who value peace of mind and flexibility above all else. I often tell clients, if being debt-free helps you sleep better and makes you more confident about your future, it’s worth it.”
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