Living debt-free life may seem practically impossible as most adults have debts in some form or the other – either a home loan, car loan or credit card balance. The good news is that living debt-free is possible, and many people have done it or are close to living debt-free. What do these people do differently? How do they manage to live debt-free? If you are ready to begin your journey of becoming debt-free, we have some tips to help you reach your goal.
1. Create a Budget and Stick to it
Your budget is like a guide that keeps reminding you that you shouldn’t be spending more than you earn. When creating your budget, first calculate your income and expenses. This will give you a clear picture of where your money goes every month. This insight will also help you make better financial decisions. After analyzing your income inflow and outflow, figure out where you can cut expenses or reallocate funds. At all times, remember that you need to stay within the budget; otherwise, your whole idea of becoming debt-free will just remain an idea.
2. Try Out the 50/30/20 Rule
The rule says that it’s ideal to spend 50% of your income on your essential needs, 30% on your non-essential wants and the remaining 20% from income. The rule is a loose guideline, and these percentages are probably the maximum that you should spend. If you want to be debt-free faster, you need to tweak this rule – spend less, increase your savings percentage, and become closer to financial freedom.
3. Don’t Dip Into Your Savings
Keep in mind that you save money to fulfill your life’s important goals. Your savings are not meant for covering unexpected costs that come your way. Consider creating an emergency fund for such expenditures. This will prevent you from dipping into your savings in case of emergencies.
4. Automate Your Savings
Thanks to technology, you can allow your money to be pulled away into your savings account the same day you receive your salary. This way, it will never touch your hand, and you can avoid the temptation that comes along with payday.
5. Pay Your Debt in Full
Paying your debt in full doesn’t necessarily mean that you have to use all your earnings to pay off your debt. It has a strategic approach. You can go about it in two ways: the snowball or avalanche methods. In the snowball method, you make a list of all your debts, the smallest ones first. Start paying off the smallest debts first and work your way up.
With the avalanche method, you make a list of all your debts, the ones with the highest interest rate at the top. You start paying those first and gradually move on to the next. With either of the methods, it’s important to keep in mind that while you are paying off the debts at the top of your list, you are also making your periodic payments on your other debts, which have yet to reach the top of your list.
Try using these 5 tips and assess your financial status after a year. See if you have made any progress and make tweaks whenever necessary in order to live debt-free.
Author Bio: Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficient. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.