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8 tips to mastering the art of debt-free living

Avoiding debt might seem impossible. However, it is possible to navigate through them wisely. This article offers tips on how to manage debts effectively.

By Christina TanPublished 11 months ago 4 min read
Photo from Nicola Barts on Pexels

Everyone has financial aspirations and goals, whether to live a life filled with luxurious goods, retire by a certain age, or do something else entirely. However, for many individuals, the reality of living with debt can get in the way of those dreams.

But it doesn’t have to be this way. A debt-free life is possible if you make smart financial decisions every day.

Living With Debt

Here’s a short example of a life lived with debt: Sarah, a fresh graduate from a small-town college, has always dreamed of traveling the world. She got a job at a local restaurant to help with her student loans and eventually achieve her goal. However, she also got a credit card she used to treat herself to some luxury goods.

Over the next few years, Sarah quickly found herself drowning in debt, facing seemingly never-ending monthly payments for her credit cards and student loans. Every time she tried to save money for her trip, an unexpected expense would put her plans on hold.

At this rate, Sarah would never leave the small town. Thankfully, she decided she had had enough and hired an advisor to help her in making financial decisions. With a proper budgeting and debt payment plan, she slowly but surely began to progress. Years passed, and Sarah managed to pay off all her debt.

She could finally afford to leave her hometown and travel the world to take in its many grand views. Sarah’s story highlights the importance of taking control of your finances as early as possible. Her predicament is also widespread, with 30% of Americans putting debt repayment as their top financial priority.

The Dos and Don’ts of Debt

Here are some dos and don’ts to help you avoid falling into the same pitfall Sarah experienced. The effects of the advice can take a while to show, but you should start as early as possible to see them sooner.

Things to Start or Continue Doing

A combination of a lot of habits and practices forms good financial health.

1. Make a budget and stick to it

Creating a budget is the first step towards gaining control over your finances. Start by observing your income and expenses to accurately identify areas where you can cut back and prioritize your spending. A general guideline you can use is the 50/30/20 rule which states that 20% of your income goes to savings, 30% to discretionary funds, and 50% to necessities.

Make sure to regularly review your budget and adjust it as necessary to keep yourself on track.

2. Prioritize high-interest debt

Paying off debt with around 6-8% or higher interest rates should be your top priority. If you must, you can pay the minimum amount for other obligations to focus your payments on high-interest ones.

High-interest debts can quickly spiral out of control after just a few missed payments, so you must settle them as soon as possible. Effectively managing your existing debt is crucial for your financial well-being.

3. Save for emergencies

An emergency can happen at any time, so it’s vital to have a safety net in place. For example, the loss of a job or unexpected medical expenses can suddenly have you earning less and spending more each month. A shock to your budget can quickly leave you in the hole if you’re not well-prepared.

Life likes to throw curveballs, but saving a bit of money each month can help you cushion the blow should anything happen.

4. Invest in your future

You can make your money work by placing some of your savings into personal investments. Some assets, such as securities, can pay dividends that provide a regular source of income. You don’t even need to manage these investments yourself. You can hire a broker or invest in a mutual fund to handle that side.

Investing early and often can make a significant difference once given time to accumulate, even if you started small.

5. Live within your means

This tip might sound simple, but you need to be realistic about what you can and can’t afford. Admitting that something you want is out of your price range can be a bitter pill to swallow, but you mustn’t spend more money than you earn.

Live within your means, and you’ll eventually get to the point where you can live the type of life you’ve always wanted. You need to admit that, right now, that thing you want is another unnecessary expense to avoid.

Things to Avoid or Stop Doing

There are a lot of traps that might seem innocent enough but can lead you to be stuck with debt for a very long time.

1. Avoid taking more debt than you can handle

Loans can help you make a large purchase, like a house or car. However, taking on more debt than you can comfortably repay will only lead to more debt and more vulnerability to emergencies.

It would be best to reduce your debts, not add to them. Debt payments fall into the necessities section of the 50/30/20 rule mentioned above, so make sure any new loans don’t push you over that 50% figure.

2. Don’t use credit cards as a long-term solution

While convenient, credit cards should be a short-term solution only. They usually have high-interest rates and are unsustainable. Do your best to pay off your credit card balance monthly to avoid accumulating even more debt.

3. Avoid ignoring bills or making late payments

If you miss a bill or payment date, the financial provider will probably charge late fees. This extra expense can worsen your debt and add up if done a lot. On top of that, consistently missed payments lower your credit score, which can be extremely difficult to build back up.

Sometimes, missing payments is unavoidable, but you need to do your best to prioritize these expenses because they can seriously affect you long-term.

From Debt Burden to Financial Freedom

Suze Orman, a finance icon, says: “People first, then money, then things.” By putting your financial health above your desire for material possessions, you can achieve the dream of a debt-free life. All it takes is making the daily decisions to invest in yourself and your future.

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