For many, becoming debt free for life seems like an unattainable goal. Yet by learning how to control debt, living debt free is not only possible but a likely outcome. With New Year’s right around the corner, now is the time to start thinking about the resolutions you will make for 2013, and living debt free might be one of the best resolutions you can choose.
For one thing, living debt free might reduce your risk of identity theft. If you know you have no debt and are suddenly contacted about purchases you don’t remember making or accounts that you never opened, you’ll immediately know that there is a problem and be able to quickly put a stop to it. Learn how technology leads to the types of identity theft that most deeply threaten your financial health here.
Start Small: Stop Using Credit Cards
Putting a stop to credit card use is the first step in learning how to live a debt free lifestyle. Credit cards are one of the easiest ways to accumulate debt, and unfortunately one of the most expensive, with interest rates far exceeding those of secured or even personal loans. Credit card use has also become so normalized, it’s easy to lose track of how much that debt is really costing you.
You can start small on your way to becoming debt free for life by resolving not to use credit cards for a certain period of time – three months, for example. By learning how to live within your means without dipping into credit card debt during that time, you will realize that it is possible to live without accumulating more debt.
Build Your Finances: Pay Yourself First
You might have heard the old adage “pay yourself first” and taken it to mean a reward before paying your debt. In a sense paying yourself first is a reward, but not an immediate one like going out to the movies. Paying yourself first is a long term reward to strengthen your finances by saving money for what really matters, your financial health. Before paying your debt and other obligations, set aside an affordable but meaningful amount to put towards:
- Retirement accounts, like an IRA or 401(k)
- Personal investment accounts, like brokerages and mutual funds
- Rainy day savings accounts that net interest
Generating a second income through a part-time endeavor is another way to live debt free that makes it easier to pay yourself first, since the additional income can replace the need to take on additional debt. Read about making extra money with webinars in Stumble Forward’s article, “Making Money With Webinars – Why You Can’t Afford To Skip Out On This Revenue Stream!”
Control Spending: Pay with Cash Only
Research has shown that people actually feel emotional pain when exchanging cash for goods and services, while paying with credit cards does not have the same impact. This means that people are willing to pay more for the same benefit when paying with credit, and are also likely to spend more overall. According to a recent study by Promothesh Chatterjee and Randall Rose, this might be because credit card users focus more on luxury, while those paying in cash are more attuned to the overall cost.
Another study found that people paying with credit cards might also be influenced by the type of device they are using, since iPad users spend roughly twice as much online as users of other mobile devices or desktop computers. Chief Strategy Officer of IBM Coremetrics John Squire attributes this in part to the fact that retailers are focusing on creating “a relevant, hyper-personalized page” for mobile users to make purchases.
In addition to staying on the right side of psychological decision making, it might also be easier for consumers who pay with cash to keep track of their overall spending, since they can see the money in their wallet gradually diminishing. Try making a cash budget for all of your non-debt expenses as a step towards living debt free.
Know What You Have: Live On a Budget
Of course, even the best intentions for ceasing credit card use and paying in cash can backfire if you don’t create a budget. Creating a budget is both a short-term and a long-term outlook on your finances, so that you know what you really have to spend once you pay off your utilities, housing, debt, and other expenses. Consider:
- A budget is the only way to balance your incoming funds against your outgoing expenses.
- A budget keeps you from dipping into savings or relying on credit cards while encouraging you to save money by trimming costs.
- A budget gives you the encouragement you need to stay on track and measure your financial performance month by month.
There is no easier way to stay on track with a debt free lifestyle than creating a budget. Even if you have considerable debt to pay off, a budget will help keep you from accumulating more debt while you work on repayment. Since you are not acquiring more debt in the meantime, any existing debt you have will be paid off more quickly, resulting in a debt free life more quickly than you might expect. Don’t make the mistake of overlooking this critical step on your path to living a debt free life.
