Debt-Free Living

Debt is no fun. It’s a grouch. It’s a party killer. It sucks. And if you’re currently living with debt, it should be considered a CNN-style breaking news EMERGENCY.

It doesn’t matter whether it’s consumer debt, student loans or a mortgage. It’s tough to live a truly free life when you owe someone else money (with interest). Most of us have been led to believe that going into debt is a relatively harmless way to acquire things today that you couldn’t otherwise afford.

But the harsh reality is debt can quickly and easily put a complete stranglehold on your life. You will always be enslaved to produce a certain level of income to service those debt payments each and every month.

Major financial emergency? Tough luck, pay up. Lost your job? So sorry, pay up. Debt doesn’t care about you or your problems and will come knocking on your door each and every month no matter the circumstances.

It is infinitely easier to build wealth, and lasting happiness, when you realize you don’t need to go down this crazy rabbit hole. It’s time to think a little differently than everyone else.

Types Of Debt

While I believe most debt is as healthy for you as drinking battery acid each morning, I’ll admit there are certain kinds of debt that can be acceptable to have. “Good debt” allows you to borrow money for the potential to earn more money later on. Student loans can be a source of good debt because it allows you to fund higher education that can substantially increase your lifetime earning potential.

Real estate can also be an acceptable source of debt, if you believe you can eventually make a good return on your investment. But please, please, please make sure to resist the temptation to buy the biggest house or condo you can afford with the biggest mortgage the bank will give you. This will nearly guarantee you a lifetime of financial hardship.

Then there are the types of “bad debt” you should 100% avoid at all costs. Bad debt does not allow for the potential for future wealth and can end up destroying your chances at it, while costing you a substantial amount of money in the long run.

Credit card debt is the number one, absolute, worst type of debt you can incur. Interest on this debt can be upwards of 20% and can derail any opportunity for financial stability if left untreated. If you have credit card debt, no reason to panic, but this needs to be paid off as soon as possible with whatever amount you are able to save each month.  

Auto loans (and yes, leases too) are another source of debt that I highly suggest you avoid. That new car you borrowed money to buy will lose nearly a third of its value after you drive it off the lot and half of its value after only a few years of ownership. And do you really think the dealership would give an option to lease if it was a good deal to the consumer? No chance. Stay away from them.

If you stop and think about it, automobiles are an incredible luxury to have, offering us ultra high-speed transportation methods that were unfathomable throughout 99.9% of human history. But they don’t need to be brand new with all the bells and whistles and they absolutely do not need to be upgraded every 3 or 4 years.

While that new car smell will certainly provide a short term pleasure boost, studies increasingly show it wears off fast and your happiness baseline will return to where it was before you got the new car.

The fact is, used cars can be just as safe and reliable as new cars but come with a substantially lower price tag*. 10 hours or less of research can literally save you tens of thousands of dollars on the purchase price. And just imagine how much that savings could grow after decades of beautiful compound interest.

If you do need a car, I highly suggest you save up for one the old fashioned way and pay for it with cash so that you own it free and clear. A rock solid car less than 5 years old can easily cost you $10,000 or less and can last a very long time if you take care of it. The average car is parked over 95% of the time. Why would you go into debt for one?

Getting Out Of Debt

The good news is your existing debt can be substantially reduced and eventually eliminated in an efficient manner if you have a solid plan in place. You may need to make a few changes to your spending habits, but I promise you it’s not that hard and is absolutely worth it to be debt free. Crushing debt is predicated on two things: your ability save each month and discipline. Nothing else really matters.

When I graduated from college in 2012, I had nearly $25,000 in student loans with interest rates ranging from 4-7%. Not an outrageous amount of debt by today’s standards (as crazy as that is), but still a ton of money. My minimum payments were $183 and my loans were scheduled to be paid off in the year 2031.

While in the midst my financial sleepwalk, I chose to go the minimum route my first few years out of college. Most of my monthly payments went to paying interest, meaning the principal $25,000 amount went down very slowly month after month. After more than 4 years of debt payments, I had barely moved the needle. I still owed roughly $23,000 in loans and felt like I was running in place.

It wasn’t until I woke up at age 26 and realized if I could just increase my savings amount and throw it all at my student debt, I could eliminate it all a very short amount of time. So I reduced my unnecessary expenses and every cent I saved (other than my 401(k) up to the company match) went directly to my student loans which was close to $1,700 a month.

I targeted those ugly 7% interest rate loans first and before long, they were paid off. I then tackled my second highest interest rate and continued to work my way down until my all loans were completely eliminated by age 27.

It took me only 15 months to tackle my remaining student loans, a full 14 years before the expected payoff date. I took it upon myself to eliminate my debt and damn did it feel amazing. It felt as though a tremendous amount of weight was lifted off my shoulders and it still feels that way today.

Get Started

Paying off my student loans has unlocked everything and has helped me to substantially save for my future through investing. Not to mention the thousands of dollars I no longer have to pay in interest.

I also recently decided not to renew my car lease on that Toyota Corolla I drove 3-4 times a month, meaning I now have even more money to save. Do I miss it? Honestly, sometimes yes. But saving for my financial freedom and a better future feels much more empowering most days.

If you have debt payments of any kind, it’s time to generate excess savings and get to work. The highest interest rates should be paid off first, then continue your way down.

After months of making substantial debt payments, you will start to see your loans decline and eventually disappear. More and more of your payments will begin to go toward lowering the principal amount and it’s a fantastic feeling when that starts to happen.

Make a game of it. Celebrate your wins both big and small. And before long, your debts will be paid off. You will then have even more money to save and invest, and you will feel so much more in control of your life. I promise you the hard work is worth it.

You can absolutely do this. Once you begin to view debt as unhealthy and dangerous to your finances, you will quickly realize that a life free from those binding chains is not only achievable, it’s simply a better way to live.

 

*For those of you in the market to buy a car or simply want to educate yourself on how to buy used, I highly encourage you to listen to The Radical Personal Finance Podcast Episode 527 – How to Buy a Used Car. Download it on your phone or simply google it. In one hour you will be armed with the knowledge to buy used.

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