Millions of Americans can barely keep their heads above water due to stagnant wages, increased cost of living, and a slow labor market. In 2020, the average American owed roughly $92,727 in total debt based on Experian’s report. This includes mortgages, student loans, credit cards, and other types of personal debt.
If you find yourself in the same situation, being debt-free is probably one of your biggest dreams. But doing so may feel like an impossible project, especially when you’re dealing with multiple debts. However, contrary to popular belief, living debt-free doesn’t always equate to having no debt.
Remember that debt is not entirely bad. Good debts can help you achieve significant goals like going to college, buying a home, or starting a business. So, we’ll show you how to keep these good debts and achieve a debt-free life.
Identify Your Existing Debts
Knowing what you owe is the first step to a debt-free life. It gives you the best chance to make a plan and improve your financial future. Obtaining a free copy of your credit report can be an excellent place to start when figuring out what you owe. You can use the information to know the total amount of your debt.
But in identifying your debts, don’t just list down the amounts. Make sure to break down the purpose of the loan, monthly payment, and the rate of interest charged. It’ll help you make smart decisions and set a priority list. Plus, you’d be able to determine if you have too much debt.
If you find out that your debt repayments are higher than your income, it’s an indicator that you have too much debt, interfering with your ability to accomplish financial goals.
Strategize Your Debt Repayment
Missing any repayments on your debt can lead to negative consequences. But you may have to set aside some of them if you don’t have enough money to pay all your debts. The key here is to strategize your debt repayment. Knowing which debts to pay off first, that’ll help you save money and get you out of debts faster is crucial.
Here are some debt repayment strategies you may want to consider:
- Debt Snowball: This involves paying off your smallest debts first. With this method, you can stay motivated about paying one bill at a time until you’re debt-free.
- Debt Avalanche: This involves paying off your debts first with the highest interest rate. Dealing with the highest-interest debt first will help get you out of debt faster. But you can go over these calculate loan interest tips to save money on total interest over time.
- Debt Consolidation: This involves consolidating multiple debts into a single loan. With one loan to manage, you accelerate your repayment and be debt-free faster.
Create A Regular Budget
Creating a regular budget is the most fundamental building block of managing your money and achieving a debt-free life. This can help you get an accurate picture of how much you can afford to spend and save each month. With a regular budget, you can better know where you stand financially and make necessary adjustments.
You need to be honest about your income, expenses, and debts when developing an effective budget. If you find that your expenses are higher than your income, consider eliminating discretionary expenses. Remember that your budget should support your debt-free life goal. This can mean putting more money towards paying off your debts.
Build An Emergency Fund
Having a debt-free life doesn’t just end with being able to eliminate your debts. So, when making a plan, you should not only focus on debt repayments. Instead, prioritize saving money and building your emergency fund.
Note that you can only sustain a debt-free life if you can steer clear of bad debts or those debts that do little to improve your financial outcome. Make sure to add monthly contributions for emergencies.
The emergency fund should cover at least three months’ worth of living expenses. It’s always best to prepare and protect yourself from any unexpected financial storm in the future.
Grow Your Money
As you get comfortable with spending responsibly and saving, find ways to grow your money. You can start putting contributions in tax-deferred investment accounts like 401 (k) or individual retirement accounts. The returns can compound over time, allowing you to create and grow your wealth.
Note that once you’re done with debt repayments, there’ll be extra cash at your disposal. Without a careful plan of action, you can end up using them on discretionary expenses.
Keep Learning About Personal Finance
Achieving a debt-free life is a continuous process. Even after paying off debts, keep living below or within your means and stick to your monthly budget. It’s also best to continue educating yourself about managing your finances. With continuous learning and discipline, you can be debt-free for the rest of your life.