High inflation, rising interest rates and a possible recession have made it tough for Americans to pay down debt and save money. Over one third of U.S. adults have more credit card debt than savings, according to a Bankrate survey. However, Americans are making paying down debt a priority for 2023, with 19 percent saying that’s their top financial goal for this year.
Having little-to-no debt often leads to a less stressful life and better mental health among other benefits. Although the road to living debt free can be tough in a country where credit is king, there are several strategies that can help you get there.
Key debt free statistics
- As of the first quarter of 2023, Americans hold a whopping $17.05 trillion in debt.
- Delinquency rates have also risen across the board for all types of debt, reaching — and even surpassing — pre-pandemic levels.
- The average American household has over $101,000 worth of debt between student loans, credit cards, mortgages, auto loans and other credit products.
- Among generations, Gen X carries the most debt with an average balance of $154,648.
- Over half of U.S. adults (52%) say money negatively impacts their mental health.
- Less than a third (30%) of U.S. consumers are debt free.
- 19% of Americans say their top financial goal for 2023 is to pay down debt.
What is debt free living?
Living a debt free life means that you cover everyday expenses out-of-pocket. In other words, you don’t have credit cards, student loans, auto loans or any other credit product to your name. However, some proponents of the debt free movement use this definition more loosely, allowing mortgages as part of the equation and credit cards, as long as you don’t carry a balance.
Benefits of debt free living
Having debt isn’t necessarily a bad thing. For instance, financing a house through a mortgage is actually an investment as it can help you build wealth in the future. Likewise, taking out student loans to better your education can lead to a job with higher earning opportunities. The problem starts when your debts are eating away a huge chunk of your monthly budget, you start defaulting on your payments or if you’re using credit to pay for everyday expenses.
That said, even if you’ve been handling your debt responsibly, having no debt can lead to many benefits, including the following:
- Less stress: According to the American Psychological Association, money is often the top cited reason for anxiety in U.S. adults. Having little-to-no debt can substantially decrease stress in your life, as you’ll feel more secure about your future.
- A healthier lifestyle: Having less stress automatically translates into a better mental state, which can also lead to a more productive and active lifestyle.
- Improved self-esteem: Having no debt means you have more free time to do things that you actually enjoy, which can boost your self-esteem, as you will feel more fulfilled as a person.
- A better social life: Because you’ll have less stress and more time available, living debt free can lead to a healthier social life — not only with friends, but with your partner, family members and colleagues, as you’ll be able to focus more on your relationships.
How to live debt free
Only about 30 percent of U.S. adults manage to live a debt free lifestyle. But even if it’s a tough thing to achieve, it’s still doable. If you’ve been wondering how to become debt free, start by following these simple steps.
Find out how much debt you have
In order to tackle your debt, first you need to assess it. This includes making a list of the types of debt you have, how much you’re paying each month, if they have a fixed or variable interest rate, outstanding balance and remaining time to pay it off. Knowing these things will help you determine what’s the best debt payoff strategy for you.
If you’re having trouble keeping track of your debts the old-fashioned way, you can always use a budgeting app to help you with this step.
Choose a debt payoff strategy
Once you have all your debt information sorted out, the next step is to choose a payoff strategy that works for you.
Quick definitions
- Snowball strategy
- The snowball payoff strategy consists of paying off the account with the smallest balance first — regardless of the interest rate — and moving up from there. This strategy is best suited for those that have debts with similar interest rates.
- Avalanche strategy
- The avalanche payoff strategy focuses on paying off the debt based on interest rate, starting with the account with the highest rate and moving down from there. The avalanche method is best for those who have a mix of debts (credit cards, personal loans, etc.) with different interest rates.
- Debt consolidation
- A form of debt relief, debt consolidation allows you to combine multiple debt balances into a single account. This can be done through a debt consolidation loan or through a 0 percent balance transfer credit card. However, this method is best suited for those who have good to excellent credit, as the main goal of this strategy is to help you pay off your balances faster by securing a lower interest rate and better terms.
- Debt management
- Debt management plans are offered through credit counseling agencies. These plans are best for those who are deep in debt ($10,000 or more) but can still afford to make a reduced monthly payment. The main goal of debt management plans is to streamline all your debts into a single account, while receiving tools to develop healthy money habits and paying off your balances in under five years.
Create a budget, and stick to it
A big component of becoming debt free is knowing where your money is going and keeping a tight grip on unnecessary spending.
After you select your debt payoff strategy, reassess your budget to spot opportunities for improvement. These include substituting name brand items on your grocery list for store brand ones and eliminating subscriptions you no longer need. You can also check current services, like your phone bill and insurance, and switch to cheaper options or get rid of extra features you don’t really need.
Once you trim all the excess, list all your necessary expenses (utilities, housing, groceries, health insurance, etc.) and their monthly amounts and subtract that from your monthly gross income. Then, assign a realistic amount for miscellaneous expenses, as well as savings. That way, you’ll have a nest egg to fall back on in case of an emergency, without having to get into more debt.
Develop positive money habits
Most people end up in debt due to unhealthy money habits. These include not tracking your spending, living above your means, impulse buying, letting debt accumulate and not setting aside money for emergencies.
Debt free life is all about kicking those habits that hinder you from having your finances in order and replacing them with healthy ones. If you need help figuring out what unhealthy habits you need to get rid of to improve your relationship with money, you can always seek help from a financial counselor or a credit counseling agency, such as the National Foundation for Credit Counseling (NFCC).
The bottom line
The key to a debt free life is to make a plan that works for you and your particular financial situation and stick to it. Although you’ll have to make some sacrifices along the way, the rewards will be well worth it.
