Is Debt Free Really the Way to Be? | Get Financial Freedom Tips | Transform Your Financial Future


Thursday, April 14, 2011

Is Debt Free Really the Way to Be?

With stories of debt weighing down people, sometimes leading to foreclosures and bankruptcies after spiraling out of control, many are considering living without debt. Is debt free really the way to be, though? How would living without debt affect your life? Would it really be as liberating as it sounds, or would a whole new set of problems weigh you down?

Is Debt Free Really the Way to Be?On the surface, living debt free seems like a great idea. Who wouldn't want to shake off the burden of constantly worrying about money? Like anything, living debt free isn't necessarily better, it's just different. There's a new set of rules when you're debt free, and not all of them are positives.

*How do I live debt free?

In theory, it's simple to live debt free: just pay off all your debts. Easier said than done, right? Most people have at least one credit card, a car loan, and possibly a mortgage. Student loans are common forms of debt these days, also. Some people suggest taking out a loan against your (401)k, home equity, or life insurance, but the problem with that idea is the fact that those are all loans. More debt. Not what you're aiming for if you want to be debt free.

Step 1: Listing your debt : That means every credit card, auto loan, mortgage, student loan, and personal loan you have. List the amount you owe and how long you have to pay it off. Then, decide if there's anything you can get rid of right away. Is the mortgage on a house that's considerably larger than what you really need? It might be time to move to a smaller house, a cheaper area, or both.

Step 2: Paying down your debt : Obviously, you're going to need to pay more than the minimum. Make a household budget and see where you can cut spending so you can put more money to paying off your debt. If you have savings and you're earning less interest on savings than the interest rate averages on your debt, it'll actually save you money in the long run to put your savings towards your debt.

It might take a few years, but eventually you'll get to living debt free.

*What are the benefits of living debt free?

- No debt hanging over your head
- Fewer bills
- Better credit...maybe. Unless you already have a very poor credit score, living debt free might actually hurt your credit score (see below)

*What are some negative consequences of living debt free?

- Less credit history, leading to a lower credit score
- Inability to get financing because of lower credit score*

*Note, if you plan on remaining debt free in the long term, this is irrelevant

So, is being debt free really the way to be?

It depends on who you are. If you truly believe you can live debt free in the long term, then it's a good idea. Reducing your debt is certainly a good idea, but eliminating it entirely could negatively impact your credit score and prevent you from being approved for financing in the future.

If living completely debt free isn't for you, here's some tips to reducing debt for a less stressful financial situation:

- Pay down credit cards by paying more than the minimum
- Pay off auto loans
- Pay your mortgage bi-monthly to reduce the total interest paid
- Keep credit card balances low to keep your debt ratio low

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