Becoming debt free should be everyone’s goal especially when we live in such volatile times. It is always best practice to have more personal wealth than debt which is essentially your net-worth. Unfortunately for most of us when you are starting out it’s almost impossible to be debt free unless you have a trust fund somewhere. This post is for the person who is trying to become debt free and wants to start getting into the habits of debt free people.
Debt free people do not become financially savvy overnight. It takes months if not years to completely have control over your money. What I mean is until you don’t owe anybody anything you don’t fully control your money. If your car could get repossessed or if your credit card balance is so high you barely scratch the surface with your minimum payments then you aren’t really in control of your money. Someone else has a legal claim to it.
The habits of debt free people that I outline below are adoptable. They aren’t arbitrary goals that set you up to fail even before you start. I always read about people who finish paying off their homes in a short period of time but were completely miserable during the process. While the journey to becoming debt free is not easy and requires sacrifice I don’t think it should steal your joy. So in essence these are the practical habits of debt free people that we can all copy.
Habits of Debt Free People
Table of Contents
Live below their means
It is so important to live within your means. Avoid overspending and overextending yourself. People will always have an excuse for spending way more than they make and will probably justify it accordingly. However buying expensive homes and cars that you cannot afford is self sabotage.
Debt free people work with what they’ve got. They have a full understanding of how much they make and how much they can afford to spend. Just because you make a ton of money doesn’t mean you have to spend it all.
Leaving below your means requires discipline. Most wealthy people will rarely shop for designer clothes and consumer products like that. These are things that add no value but cost so much.
Have a budget that they stick to
Budgets are so important regardless of whether a person wants to be debt free. Financially savvy people always have budgets and are aware of where their money goes.
It’s stunning to see how quite a few people don’t budget. They are never quite sure what they spend and how much they spend on various things throughout the month. Such people frequently have overdrafts which can become quite costly.
Debt free people maintain budgets that they follow strictly. This ensures that they always stay ahead of their bills and their savings. If you aren’t a super techie person there are budget apps that you can link up to your bank account that will track everything you do. They even provide opportunities for saving. So check them out.
Emergency Fund
Another great habit of debt free people is that they have an emergency fund. The recommended amount is $1,000 but you can start small and build it up. Obviously the more you can put away the better but the standard $1,000 will ensure that you are covered for those curve balls that life throws you.
Setting up an emergency fund is one of Ramsey’s steps that we see here for anyone who wants to achieve financial freedom. It may be hard at first but once you start seeing the fund grow it will motivate you to keep at it.
Make extra money
Like many people when I got out of college I had an incredible amount of debt. In true ‘just graduated’ college and got my first good job style I bought a fancy vehicle on loan. So not only were my student loan payments now due I had a car payment to pay every month.
It soon became clear that I needed to make extra money fast. There are various ways that you can make money from home and then you can get an extra weekend job to tide you over. For me the extra income was a way to reduce the burden of debt.
Making extra income will look different for everyone. Maybe you could start a business in addition to your day job. For someone else it may mean getting a part time job to bring more money to your household. Whichever way works making extra income is one habit that debt free people have.
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Save Actively
Saving actively means that you save a predetermined amount every month. Debt free people usually save up-to 6 months worth of their monthly expenses. What does this look like? If I have $3,000 monthly expenses it means that in addition to my emergency fund I also have $18,000 saved up.
This is not an easy task by any means and I do not take this lightly. It requires an evaluation of the things we spend our money on to ensure that they are necessary. Why keep paying for things you don’t need? Make sure you check out this post on how to save money.
Once you have a predetermined amount it’s best practice to automate it. Set up a bank account separate from your checking/spending account to have the money deposit straight from your paycheck. This means that you never mingle your savings with your spending money. It requires self control but in the end that safety net will ensure you sleep well at night.
Give
Debt free people give and support their communities. The suggested amount is 10% of income. People who are debt free have extra to give. Once we learn how to prioritize giving we are more responsible with our money.
Giving to support worthy causes is a sign of maturity. Additionally giving is great for taxes come tax time because donations and charitable contributions are tax deductible. Identify causes that you support and donate towards them. It is such a rewarding and fulfilling experience to give back.
Avoid big credit Card balances
Credit cards are not a bad thing especially when used intelligently. Most credit cards offer rewards that are great. If you travel you can get miles to travel for free. If you get points that can be converted to money equivalent you can save on various purchases. The trick is to use them smartly.
Never only make the minimum payments. Always pay what you spend. Remember we should never spend what we don’t have and using credit cards to survive is the equivalent of borrowing and living beyond our means.
In avoiding big balances you also avoid high interest payments which isn’t the best use of your hard earned money. If you don’t trust yourself then avoid credit cards all together. To repair your credit if you have had problems in the start I recommend starting here.
Avoid non-essential expenses
What are non-essential expenses? These are the things that we spend our money on that we do not need. I always scold myself when I have all these shopping bags full of things I already have. Clothes and shoes that I don’t need comes to mind.
Debt free people use their money for things that they truly need avoiding the consumer trap. I am slowly transforming into a minimalist because we really don’t need much to live happy fulfilled lives.
This coming holiday season make it a point to reduce spend and see how you feel about it. I mean truly what do we really want that we don’t already have?
Keep journals and track their money
Have you heard of bullet journals? I absolutely swear by them. You can use them to track just about anything. I love the visual effect of a bullet journal and I have linked various examples here to help you track money.
Debt free people track money daily, weekly or monthly using bullet journals. A bullet journal will tell you how much you’ve spent and how much you have left over. You can tell how much money has come in and what you expected. The variance calculation tells you how much wiggle room you have.
Journals will help to manage spend to ensure you don’t fall into the debt trap that comes with over spending.
Have retirement funds
Debt free people are aware that you cant work forever and you shouldn’t work forever. At some point you’ll want to resign and hang the ropes up. For some people it comes earlier than others. It’s really just how much money you have saved up and the type of life you want.
Use the various opportunities that are out there to save for the future. I use a 401K and I fully recommend having one. Read here to see why you really need a 401K plan.
I hope that these habits of debt free people are useful in your journey towards financial freedom.
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