Believe it or not, a large – and growing – segment of people are managing to live their lives debt-free. And, perhaps just as amazingly, they are doing this by choice. It isn’t the easiest decision you could make, but it has the potential to be one of the most beneficial…and satisfying. If you are willing to make the effort, there are any number of ways to cut spending, resolve debt and fill any financial hole you’ve dug. It all comes down to choosing the path that best works for you and gives you sufficient “wiggle room” so you can stay on track for the long haul.
According to The Urban Institute, 28% of American adults currently have a debt in collections. This consists of non-mortgage debt that is more than 180 days past due, such as a credit card balance, medical bill or utility charges. For those people, legitimate debt assistance or strategies to cope with debt are available. Our aim is to help you avoid this circumstance altogether.
Regardless of your past financial situation, you can keep debt from affecting your life going forward. All it takes is your determination to be debt-free and a strategy you can stay with consistently. Here are six tips to help you develop your battle plan:
1. It all starts with savings
The best weapon in your debt-reducing arsenal is a healthy savings account. Savings give you the means to handle unexpected expenses; when medical bills or car repairs pop up, you’re covered. But saving is not just for emergencies – there are also many longer-term expenses, such as tuition fees or a new home purchase. And yes, even “extravagances” like vacation travel can be part of the scheme as well, if you’ve successfully set money aside for it.
To further boost your savings, look for high-interest accounts, like First Internet Bank’s Money Market Savings account, which offers rates above the national average. With some judicious trimming in other areas, you have the opportunity to build your savings buffer quickly…and safely.
2. A better way to use credit cards
For some people, dealing solely in cash (or debit card, of course) helps to curb impulse purchases or running up a huge credit card balance. On the other hand, having a credit card does make traveling, renting a car or hotel reservations simpler. If you do choose to have a credit card – or cards – use them to your advantage, reaping rewards points or cash back (like enjoying 3% cash back for gas purchases with the First Internet Bank Cashback card). Here’s a tip to help you avoid falling into the credit card debt trap: make it a strict rule to pay off each purchase you make as soon as possible…even on the same day, if you can. This will cause you to actually consider how much money you have in your account before you swipe.
As an aside, it’s important to remember that not all debt is bad. By maintaining consistent (and complete) card payment habits, your credit score stays high…and results in lower interest rates for the loans you choose to make.
Good debt includes mortgages and student loans (assuming that they are not too high). On the other hand, bad debt would involve credit card balances that remain stubbornly high, most car loans (due to depreciation) and – obviously – payday or other high-interest short-term lending.
3. A pre-owned car is still new to you.
With new car prices as high as they are, most Americans can’t afford to buy them without getting a loan. But there’s always an option – and it could be one of the many reliable pre-owned cars that are available. If you take the time to shop, it’s still possible to find vehicles in a price range that make a straight cash purchase workable. Sure, there is always risk involved in purchasing a used car, but with a little due diligence, you can reduce the odds of landing a lemon. Research reliability statistics for the car models that interest you, find a good mechanic to check out any potential choice and let the logical (not the emotional) you decide when you finally want to buy. You might just get an affordable car that will last for years with relatively little maintenance. For big-city dwellers, public transportation can be an excellent way to avoid making a car purchase altogether, but that obviously won’t be a practical choice for everyone.
4. Considering college? You have choices.
When you look at higher education, students willing to take out loans certainly have more options in terms of school selection, and for many it’s the proper choice. However, that doesn’t mean you need to borrow a large amount of money to get a great education. In many cases, starting at a community college before transferring to a more prestigious university allows you to receive transferrable credit hours at a much lower cost.
In addition, it always pays to look for available scholarships and grants; these, too, can significantly reduce the overall cost of college. In some cases, it be a necessity to take out student loans, especially for medical school or other specialized programs. But with so many current and former students struggling to pay off significant long-term loan debt, an increasing number of people are choosing to take a more considered path through their college education instead.
5. Rent or Buy? Yes.
Real estate continues to surge – to the point that buying a home may seem out of reach for many people. When your goal is to be debt-free, housing will likely be your biggest challenge. However, saving (as we previously discussed) for a modest home is still a reasonable goal. Yes, it could take a long time, depending on your income level, but spending a number of years renting and saving makes good financial sense. While renting can have its challenges and frustrations, there are affordable options that are more than adequate in most regions, and renter’s insurance is fairly priced.
When you are ready to buy a home, finding the loan that best fits your budget and your long-term goals is crucial. First Internet Bank offers a full suite of mortgage loan products and a knowledgeable team to help you go from application to closing hassle-free.
6. Buy only what you need
Repeat after me: There are no “irresistible” shoes. Or juicers. Or even puppies (although that one might be on the cusp). Impulse shoppers would be amazed at the amount of money they can save by simply thinking before they buy. Research the best deals and always ask, “Do I really need this?” You don’t have to altogether withdraw from being a consumer, but you can learn to have fun without spending a ton on things of questionable value to your life. Like anything, it takes practice. If you know you are going to need guardrails to stay on the path to money-saving, take the time to make a budget and set reasonable rules for yourself.
Obviously, not all of these tips will be right for you. Perhaps you are not currently in the market for a home, car or going to school. But the same thread runs through each of them: with some forethought, restraint and willingness to build that rainy day fund (hopefully with that high-yield Money Market Savings account), you can be on the way to freedom from debt – now, and in the future.