Banking » Savings » How Can You Live Debt Free?
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How Can You Live Debt Free?

With a couple of basic rules, living debt free it definitely possible. There are no big secrets - just make sure to follow these 11 important steps.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: June 3, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

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Table Of Content

Have you ever really looked at how your friends save and spend money?

You could have one friend who makes $90,000 a year and manages to pay off $100,000 in debt in just 3 years.

Yet, the other has a similar income and only manages to pay off $35,000 in the same period.

What you may not really pay attention to is that only one of these people is actually getting on the path to debt-free living.

How Can We Explain It?

Now, there are a number of reasons why your second friend may not be paying off their debt.

Maybe they are overspending their income and they don’t have enough money to pay down the debt.

That could actually cause stress and even problems in relationships within their household. And unfortunately, it’s difficult to make changes to your behavior.

But it definitely can be done if you recognize that all you have to do is make some changes to how you actually handle your money and then work on learning new characteristics that will help you along your way.

If you’ve never been in debt or you’ve managed to pay off your debt it’s important to learn how to stay debt-free.

If you haven’t it’s important to learn how to get debt-free. And it takes a few important steps to get you there.

1. Be Financially Educated

No matter how smart you are it’s important that you keep right on learning because anyone could find themselves in financial trouble.

In fact, there are people all around the world who are extremely smart but manage to find themselves in a whole lot of debt trouble.

Installment loans and credit cards are the ones that pull most people in and these bad debts can really wreak havoc on your life.

On the other hand mortgages and college, loans can give you more value and they may not be considered as bad.

Learning about this and learning about other factors affecting your debt online is a great place to start.

You just need to make sure that you’re paying attention to what you find and that you’re continuing to work toward changes and improvements in your current debt strategy.

The key is to know how much you’re earning and how much you’re investing and definitely your spending.

2. Set a Goal

It’s going to be a whole lot easier to make big changes if you have a goal in front of you.

That means you’re going to be working toward something and it’s going to help you in the long run.

“Try using this trick of the wealthy. Feel into your dream goal or purchase. Really make an emotional connection with this desire and how it will feel to finally attain in. Then train your brain to ask the following question every time you feel tempted to buy something: is this purchase worth delaying what I really want for temporary pleasure? Most of the time, the answer is no.” says Danielle Alexandria, a financial empowerment coach.

“What’s good about this strategy is that it uses your own inspiration rather than punishment to help you make better spending decisions. It’s a smart way to build the discipline you need to achieve your goals, just like the wealthy”, says Alexandria.

The goal of being debt-free is great and from there, you just need to map out the right strategy to get you there.

3. Create a Budget

If you don’t have a budget it’s going to be very difficult for you to figure out how to pay all of your bills and how to keep up on the things you need.

You want to know how you’re going to balance out payments and income and expenses. You also want to know how to deal with sudden or unexpected cash that comes in (such as for birthdays or other holidays). The key is to avoid credit cards.

Now, you can’t do a whole lot about things like your car payment or your mortgage (unless you sell them, of course) but you can make a difference on other areas.

You can choose where you’re spending your discretionary income and whether you’re going to go out to eat as much as you did before (as an example).

The 50/30/20 budget is a good way to get started because you break everything down into only three different categories.

You spend 50% of your income on necessities, 30% on wants and 20% toward your debt or savings (depending on where you are on your plan).

4. Start Tracking Your Spending

You need to know what you’re spending money on before you start looking at ways you’re going to get yourself out of this problem, or you’ll end up right back where you were.

Create a spending log that you can take with you everywhere you go. Every time you spend money make sure you write it down in your log.

Write how much you spent, what you spent it on and maybe even why you bought that item (maybe you bought a new alarm clock because the old one is broken or you bought a new book just because you wanted it).

For those who struggle with pen and paper methods you can use a debit card and your account statement to do the same thing. Alternatively, you can use an app that will help you during the process.

Once you know how much you’re spending and where you’re spending it you can evaluate everything by asking yourself ‘how much am I spending on interest per year’ and ‘how much of my monthly income is paying off debt?’

These two questions will help you get a whole lot further in deciding what you should (and shouldn’t) be spending your money on.

5. Pay Off Credit Cards

Having a zero balance on your credit cards should always be your goal, so make sure you’re paying off everything you charge by the end of the billing period.

This makes sure you start over with nothing owed (and no interest).

That no interest bit is the most important part and it’s going to allow you to borrow money in the best way possible. You just need to make sure that you pay off everything that you charge before the billing cycle ends and you’ll be ready to go.

Now, on the other end of things is what happens if you make only the minimum payments every month. That’s a surefire way for you to end up in debt for a long time.

If you’re only making the minimum payments you’re going to end up paying that debt over several years if not decades and that’s definitely not going to help you live a debt-free life.

Now, knowing what the terms are on your credit cards is another important aspect. Make sure you know the actual interest rate and how it’s applied. Know why it might increase (and if it does make sure you know the reason behind it).

Make sure you know when any introductory or special offer periods will end as well. By knowing everything about your card you’ll be setting yourself up to make the most out of it in your favor.

6. Know Where You Make Mistakes

You should always be able to tell where you’re making mistakes and what things you’re spending more money on than you should.

Take a look at your bank statements or your spending logs to find out for sure and then see where you need to stop spending (or at least cut back).

  • Exceeding your data plan
  • Eating out
  • Buying extras of items you don’t need
  • Impulse shopping
  • Sale shopping

7. Find New Ways To Pay Off Debt

You don’t need to stick with just one method for paying off your debt and you don’t need to worry about using a method that your friends or family tell you worked for them.

Instead, take a look at different options, like paying off your highest interest debt first and then working your way down toward the lowest interest debt last.

Or you could choose to pay the smallest balance first to give yourself a little extra incentive and then work your way up toward paying the largest debt off.

No matter which of these methods you go with you can absolutely succeed. Or you may choose to consolidate your debt and work on paying all of it off at once, at a single interest rate.

No matter the option, you need to make sure that it’s something that will work for you. From there, you can make a huge difference in your own life.

8. Be Willing to Sacrifice

All those fun things that you’re spending your money on are just that, fun.

But if you’re trying to get out of debt or live a debt-free life you may have to cut back on those things.

This is where you’re going to have to make some cuts and decide what’s really important and where you could stand to cut back a little (or a lot) even if it’s only temporarily.

“While fun can be expensive, I recommend using pleasure as your basis for evaluating spending decisions. Go through all of your spendings for the past 6 months and rank each purchase on a scale of 1-10 by how much joy you felt as a result of buying it. That afternoon pick-me-up coffee, maybe it’s only a 6/10.

Are you using your gym membership? Maybe it’s honestly a 3/10. Most of us are spending money mindlessly on things that don’t really give us much meaning so it’s important we bring awareness to it. As a bonus, redirect the savings towards your bank account, debt repayment, or investing”, says Alexandria.

9. Don’t Max out Your Credit Card

Maxing out a credit card is going to make it extremely difficult to pay off.

And you’re not going to have that backup in case something happens and you need it.

Plus, you’re going to be increasing your credit utilization on your credit card. All of these things are going to make for even more problems for you in the future.

10. Avoid Emotional Spending

Research shows that emotions are a big part in how we make decisions.

Don’t let your emotions get the better of you and convince you that you need to spend a whole lot of money. Don’t let them even convince you to spend any money.

The truth is, if you’re emotionally invested in something you don’t need anything else to convince you to buy it. And that can be a dangerous precedent to set.

Emotional buying is a large portion of impulse buys and it doesn’t reflect an urgent need or even a long-term or tangential need.

You may not do any kind of research or look for alternatives or less expensive options. You just purchase because you want it and you want it now.

Make sure you pay attention to areas where you tend to emotionally shop or buy on impulse.

11. Pay Yourself First

This is actually all about saving money and it means saving through things like IRA’s and 401k’s. You also want to make sure that you have insurance, like life insurance and disability care.

Make sure you have a health savings account that has money in it and even a savings account and emergency fund.

Each of these things are going to be ways that you can pay yourself first and make sure that you are getting yourself on the right track.

Be sure that you have an accountability partner who will keep you to your goals and plans, making sure that you’re able to get to that goal of debt-free living.

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Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
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