Do you know anyone who is debt free? Are you envious and wish you could be like them? We bet you think they’re lucky, rich people. The reality is, however, you don’t have to be wealthy to be debt free. Yes, some are born with a silver spoon, but many start off with some sort of debt (student loan, mortgage, car loan, whatever) and then work assiduously to eliminate it.
Whether your goal is to be debt free in the near future, or simply to reduce your debt, we could learn a few lessons by observing the habits of debt-free people when it comes to their money. Imitation is the highest form of flattery, so let’s review their approach and see if it can help us take better control of our finances.
They live within their means
First and foremost, they live within their means. If they earn $100, they don’t spend $105. When you spend more than you make, the excess is usually funded by new debt.
They recognize that most debt represents consumption brought forward, meaning instead of taking time and saving to buy something in cash, you buy it now with debt. There are exceptions of course for example, needing to borrow to pay for unexpected medical bills is not consumption brought forward; however, taking a mortgage to buy a home is consumption brought forward, but it is generally impractical to save for the full cost of a home (we therefore have no choice but to borrow).
Importantly, they realize consumption brought forward is expensive, which is represented by the interest you pay on the loan. Most times, the cost of borrowing is simply not worth it; debt-free people pay attention and refuse new debt.
They have a budget
Debt-free people live by a budget. They know they can only repay existing debt by saving more and using the increased savings to pay down their loans. They apply all the principles we described in The Budgeting Series.
They pay attention to details
Debt-free people pay close attention to their finances. They know their income and expenses in detail – nothing is a surprise and expenses in particular are tightly managed AND compared to the budget they set themselves.
They are unlikely to miss a loan payment or accidentally run into overdraft. They avidly check their credit card statements and make sure there are no charges they cannot account for, or recurring expenses (e.g. unused club memberships) that should be cancelled, or charges for automatic rollover of services they no longer require. They also know everything they pay for in cash.
They do their homework and when faced with situations they do not understand, they seek help and are unafraid to ask questions.
Put another way, they work hard to keep their money.
They pretend they earn less
We aren’t saying that debt-free people lie about how much they earn but that they try to live on less than they actually make.
They think, “what if I were to earn 25% or even 50% less than I do right now?”. They then construct their lifestyle on this lower level of income and save the rest. Apart from obviously being able to save more, they live stress free because they know they will survive if their household income were to fall suddenly. Now that’s forward thinking!
A simple example would be if you have a two income family, try to live on only the income from one spouse and save the other’s entirely. You may not be able to do this immediately, but it could be achieved incrementally. Remember we can easily find expenses to apply against income. A good habit is to challenge yourself to live on less income. It is easier than you think.
They have a long-term view and set goals
Debt-free people have a long-term outlook. They remain focused on the big-ticket life events and they set goals and save towards them, like buying a home, sending their children to university, or their retirement. They are not impulsive shopaholics after instant gratification.
Saving becomes less burdensome if you know what it is going towards, and when you’re focused on your goals, you can truly commit to saving. It doesn’t mean that you can never enjoy the finer things in life, like a new outfit, or that Mediterranean cruise, you just have to save for them.
Debt-free people know how to negotiate. They aren’t afraid to ask for a waiver of fees, a discount on major purchases, or a reversal of an interest charge because of one late credit card payment.
Their philosophy is “it can’t hurt to ask,” and more often than not, they win!
Debt-free people live by the mantra Save, Save, Save! They save all their extra earnings like bonuses and salary increases, and their cash gifts, because they know every dollar you save today goes towards your long-term financial freedom. They make their savings automatic and do not even consider missing a month.
They say “No”
Debt-free people know their finances better than anyone else, as we all should. They know when to say no to the banker who offers them more debt than they wish to take on, they know when to turn down an invitation for an after-work drinks lime or lunch with colleagues. We all know that these events can easily run into hundreds of dollars, and only you know if you can afford to spontaneously blow your money like this. It doesn’t mean you shouldn’t have any fun; there are many cheaper alternatives e.g. host a lunch or dinner at your home and do the cooking yourself.
They know the value of cash
Debt-free people know the value of cash. It’s easy to overspend when you’re always using plastic – credit cards lack the feel of cash and it makes spending much easier.
Even if they’re using credit cards, debt-free people think of them as cash and insist on limiting their spending to an amount they can repay in full on the due date. Using cash means there is no opportunity to pay later.
If instead of using plastic you used cash for your purchases, you would suddenly become more aware of how quickly your money was slipping away from you.
Think “Be Debt Free”
So if you want to be debt free one day, set yourself small achievable targets, for example, to reduce your debt by a specific percentage or dollar amount next year. Start by making changes to your spending habits and try to emulate debt-free people.