4 Unexpected Benefits of Living a Debt-Free Life
In today’s world, living a debt-free life may seem like an unachievable pipe dream. Managing personal finances and reaching long-term financial goals seem especially challenging with burdens like credit card debt, student loans, mortgages and auto loans.
This article touches on:
- Why you should and how you can live without debt
- The four unexpected benefits of living a debt-free life
- Jump-starting your debt payoff and work toward financial freedom
How and why living a debt-free life is possible
Living a debt-free life is more achievable than you think. Before we explore why that’s the case, it’s important to define what “debt-free” means.
Some believe that the definition applies to all expenses. In other words, it means making all of your monthly payments in cash or with a debit card.
Another school of thought believes that debt-free should not include mortgages. You could make the case that your mortgage is technically an investment in an asset, and it should grow in value over time, and you can sell it down the road. Rent is also typically not included in debt calculations since you’re not borrowing money to pay it.
For the sake of discussion, this article refers to the second definition. When we say debt free, it’s specifically referring to debts associated with:
- Outstanding credit card balances
- Personal loans
- Medical bills
- Student loans
- Car payments
Understanding how to become debt-free requires learning more about how to get out of debt, but it comes down to a few things:
- Researching debt payoff strategies like “debt avalanche” and “debt snowball”
- Creating a debt repayment plan
- Budgeting so that your monthly expenses are equal to or less than your monthly income
- Avoiding taking on new debt
- Controlling your spending habits, eliminating impulse purchases and living within your means
- Putting money for an emergency fund into a savings account
If you follow these guidelines, you may be able to lower your debt and reduce your financial stress.
You can try different techniques to help too. For instance, you can look into debt consolidation loans or balance transfers to help refinance and pay off your debts at a lower interest rate.
4 benefits of living a debt-free lifestyle
Some make the case that living with debt payments is necessary. For example, you may need a car loan to drive to work. Or, student loan debt can help you obtain an education. And, if you are responsible with your money, you can be a borrower who uses debt carefully to build your credit score or secure various credit card rewards.
While the choice to take on debt will vary from person to person, many benefits come when you start paying it down. You’re likely better off working to pay down debt and closing accounts with your lenders. Below are the four unexpected benefits of living a debt-free life:
You save money on interest
Some loans, like car loans, have fixed interest payments. There’s an option to pay more, but the amount at the end of the loan is fixed; you owe a predetermined amount of money.
Other forms of lending have fluctuating interest payments, like credit cards. Credit cards have compounding interest, so the lender charges you interest on top of previous interest charges. Over the years, the money you spend on interest could add up to thousands of dollars.
Paying off debts saves money in the long run, reducing compound interest’s impact.
Experience less stress
There’s no denying; debt is stressful. Living paycheck to paycheck and worrying about how to manage your finances can cause anxiety.
Being debt-free provides peace of mind, and you don’t have to worry about your credit report, bank account or calls from debt collectors. The financial freedom that comes with being debt-free can do wonders for your psyche.
Start saving money
Once you’re out of debt, you can start to save money and work toward your financial goals. Maybe you’d like to take a special 20th wedding anniversary trip with your spouse. Or you could be eyeing a new car. Perhaps you’d even like to think about retiring early.
Perhaps more importantly, being debt-free allows you to build an emergency fund. As a rule of thumb, these funds should cover at least three to six months of living expenses.
An emergency fund provides comfort: You know that if you were to lose your job or have a medical emergency, you would have cash on hand to cover it.
Potentially improving your credit score
Numerous factors influence your credit score, including your credit utilization rate, how many credit accounts you have open and your amount of available credit. Many of these factors are bound to improve as you begin to pay off debt, which boosts your credit score.
A higher credit score means receiving larger credit limits and better interest rates. Becoming debt-free and building your credit score could be particularly beneficial when you need to rely on credit, such as when purchasing a home.
Start working toward becoming debt-free
If you have debt, getting out from under it may feel impossible. Perhaps your balances feel insurmountable or high interest rates make it harder to find the extra money to pay down your principal. However, you don’t necessarily need to feel this way. Living a debt-free life is possible.
With some financial planning and thoughtful money handling, you can pull yourself out of debt. Doing so has its perks. Living a debt-free lifestyle can save you money and allow you to start working toward your financial goals. It also can help raise your credit score — and lower your stress levels.