Choosing to live debt free can be one of the most liberating choices you’ll make, impacting far beyond your finances. A debt free life makes you flexible and resilient and frees you from lots of worry. Perhaps you’ve never been in debt before, or perhaps you’ve paid off all your debt. Or you might be currently paying off your debt, with the debt free life as your goal. Either way, having guidelines in place will help you stay the course and keep you from taking on more debt.
Budgeting is important for everybody, but especially for those who want to stay debt free. Not budgeting is one of the quickest ways into (or back into) debt. If you don’t budget, even regular expenses will take you by surprise and you’ll find yourself short on cash at the end of the pay period. You’ll be faced with two bad choices- to not pay your bills or to take on extra debt to cover your expenses. Budgeting helps you plan for expenses and ensures that you have the money to cover those expenses. Budgeting maintains a positive cash flow, which builds net worth, and prevents a negative cash flow, which leads to debt.
2- Keep a Healthy Emergency Fund
Budgeting helps you plan for regular expenses. But not all expenses are regular, so a good budget also includes regular contributions to an emergency fund so that you have the money to cover those surprise expenses. An adequate emergency fund should at least have $1000.
To maintain an emergency fund, you need to be contributing more than you are taking out of the emergency fund. If you find that your emergency fund is always running dry, you are either not contributing enough, or you are withdrawing money for expenses that are not true emergencies. Dave Ramsey says true financial emergencies need to be urgent, unexpected and absolutely necessary. If an expense doesn’t meet these three qualities, don’t use your emergency fund.
While $1000 is a good amount for single unexpected expenses, don’t stop there. You should also be building a fund that will cover several months of expenses in the event that you lose your job or are unable to work.
3- Learn How To Save Effectively
A debt free life includes freedom from car loans and leases and perhaps even home mortgages. Presumably, you plan on eventually replacing your current car, going on a vacation, or making some other big purchase. Instead of using debt to finance these purchases, you’ll need to learn how to save up for these things. This means including your savings in your budget, setting up a savings account or investment account, and regularly contributing towards your savings goal. This takes discipline, but pays off when you aren’t tied to a monthly payment and stuck paying interest.
4- Your Credit Score is Still Important
Many people who decide to live debt free assume that their credit score doesn’t matter anymore. They aren’t planning on taking on any new debt, so why would it? While this is a logical assumption, and while your credit score is primarily used by lenders, this isn’t the whole picture. Other industries have begun finding your score useful as well.
Consumer Reports details how insurance companies use credit scores, or at least variations of traditional scores to help them determine your premium. Apparently the reasoning behind this is twofold- your score predicts the likelihood of you paying your premium and high scores correlate with safe driving. Fair or not, this seems to be the reality, and is a pretty good incentive to maintain your credit score.
Landlords often use your credit score to determine what kind of renter you are. A good credit score predicts a renter that will pay promptly and in full, helping the landlord avoid one of the biggest headaches of renting. Landlords will either entirely avoid renters with low credit scores or will require a higher security deposit. If you don’t own your own home, this is another incentive to maintain your credit score.
If you enroll in contract or post pay cell phone plans, cell phone companies will often run a credit check. They may offer a smaller selection of plans or require you to prepay if your credit score is too low. While not as big of a deal as high insurance rates or limited rent options, this may be an inconvenience as well.
4b- Use Credit Cards Wisely
For some people, living debt free means only using cash (or cash equivalents such as checks and debit cards). However, many people find credit cards can still be useful tools. Since credit cards offer better fraud protection than debit cards, a credit card is often a wise choice for internet shopping. Debit cards often place large holds on your bank account, temporarily tying up funds. Several credit cards offer cash back or other rewards for your purchases. As long as these are purchases you would have made anyway, this is essentially free money. avoid all interest charges by paying their balance in full each month. In short, credit cards are safer than debit cards and more convenient than checks and cash.
Credit cards have a bad reputation for a reason, however. Credit cards do tempt many people to overspend and are an easy way to fall into debt. Once you fall into credit card debt, it is hard to dig yourself out because of the typically exorbitant interest rates. If you know that you are vulnerable to overspending and falling in debt with a credit card, the benefits are not worth the risks.
One strategy to reap some of the benefits of having a credit card while avoiding most of the pitfalls is to only use your credit card for recurring bills. Use the autopay feature on your bills payment websites and enter your credit card information. Once this is entered, you can lock your card up somewhere or freeze it in a cup of water. Make sure your credit card bill is also set to be auto-paid in full from your bank account.
As long as you can stay within your budget and always pay your credit card balance in full at the end of the month, credit cards can be great tools. You’ll never owe a dime in interest and will rack up those rewards and other benefits. But if start carrying a balance or overspending, credit cards will quickly become your worst nightmare.
5- Learn to Be Content
Learning to be content will make it a lot easier more fun to stay debt free. Not only does discontentment leave us miserable, it also makes it very hard to stick to our budgets. When we’re not content, we have a constant drive to spend- both on little things and big things. Sure, its possible to stick to our budgets without being content, but it will be a constant struggle against ourselves, and we’ll be miserable doing it. Far better to learn contentment and be happy budgeting. And happy with life in general.
Most importantly, have fun living debt free! Sure, the debt free life takes a little bit of self-discipline. But being free from monthly payments, and watching your net worth grow as you make interest work for you and not against you is one of the most freeing experiences of your life. Enjoy it!