Can you imagine having no debt? What kinds of decisions come with each paycheck when you owe nothing? Your savings account is bursting at the seams, so you can add some more to the world travel budget. But wait, that budget is set for two years of travel already. Your time volunteering and visiting the orphanage you helped fund in Haiti will happen when the kids are on school break, so maybe it's time to put a paycheck or two into the business you've always wanted to start. That could even add money to your money and set up the family for when you're gone. No worries.
This kind of dreaming doesn't have to be a dream. Whether you're in a stage of life where college planning is central, retirement is imminent, or marriage and joint accounts are calendar days away, being debt-free is possible.
Instead of dreams of running away from it all and cracking coconuts on a deserted beach, take a few minutes to think about how you really want to live -- maybe with electricity and some great vacations -- and see how you can get started today.
Knowing your debt and your spending can free finances and prevent draining them in the future. While being $12,000 to $200,000 or more in debt may not sound great, it can be good, really. Installment loans and credit cards are often bad debts, but home mortgages and college loans generally are good debts because they have lasting value. Try a range of calculations with current and expected income, payment amounts and length of loan. Median debt for a college undergrad, for example, is about $20,000, and a 2009 study found that the average repayment time was 11 years [source: College Board].
If the large debt numbers are overwhelming, try learning about your own small purchases and how they add up. Keep receipts for a month or so, including those small grocery, drugstore and fast food purchases, and highlight items bought as "extras" or treats -- the non-essentials. These could be pricey condiments from the international food aisle or electronic gadgets or new lotions and cosmetics or toys for kids. After finding your personal weak spots or spending trends, limit these types of buys to once a month so they become a real treat. Money saved can go to larger debts.
With some knowledge of your buying "triggers," changing habits may be necessary. If you spend Saturday mornings shopping on the Internet or you can't pass that antique shop down the road without popping in for a look, take a fast from the Internet and a different route around the shop. Flee temptation by physically separating yourself from it. If leaving work at lunch time costs no less than $7 per day, bring leftovers and stock your file cabinet with snacks, but stay in the building. It could save you $200 or much more per month.
Even avoiding the places where we spend doesn't stop the money "deals" that come in the mail. Offers of "no money down!," skipped payments and equity lending appeal to the sense that we are good enough customers to receive the offers. But the truth is that we're receiving the offers because we are really good consumers too, and taking the bait on unsolicited credit leads to more debt.
Large or small, bad debt is bad debt. There are no gray areas, and spending habits can keep us where we are. Flee temptation now and you can be free to enjoy more money later.
Financial planning tips in books, on Web sites, and from friends and family can help us get rid of debt. Some suggest paying off the highest-interest bills first and when done, applying payments to the next debt, plus the amount you had been paying on the first. Payments increase in size with each pay-down, and debts clear faster. Others propose clearing the smallest balances first because it is motivating to eliminate a payment or two up front. Those smaller debt monthly payments then go right back into paying other bills. Still others suggest consolidating all debt and paying it off in a larger monthly payment.
Choose a method that appeals to you. If a popular or highly successful plan for one person doesn't help you make real gains, try another, and keep going!
Once you reach a clean slate or are down to just one card, consider whether you need a credit card at all. Maybe having one bank card for emergencies is a comfort, or maybe you're ready to rely on a savings cushion instead. Not having the plastic can lead to a new way of spending in the now, with cash in hand and no interest later.
There are different camps of coupon users and bulk buyers. Some clip, file and track for the maximum in savings. Others dabble in buy-one-get-one here and there with trips to the warehouse club for stock loads of diapers or toilet paper. Others toss the savings circulars and shop in frequent trips looking for what's on sale at the moment.
Knowing your spending triggers can help in choosing a value "camp." If you have a large family to feed and enjoy the bargain hunt itself, coupons are a goldmine for budget-stretching. If you eat lots of fresh food and keep short supplies on hand, fitting your lifestyle into the available coupons could lead to stocking items you won't really want to eat and use.
Shopping at bulk stores doesn't help with budgeting when you're picking up lots of extras. Stick to stores and aisles that have only what you need so you can't be tempted to buy what you don't. Many grocers now have bulk aisles without the foray past the rugs and DVDs, for example.
Reaching a balance that works for you is often a matter of tracking your receipts for awhile and trimming them down with each trip.
Working toward a purchase can build the anticipation of owning it at once, once and for all. Anticipating a needed purchase can soften the blow of having to come up with the money for a big ticket item without the dread of the debt and financing that come after. With some cash in hand for a down payment, even negotiating a lower total price is possible.
Bank accounts are fairly easy to open, and dedicating one to a planned purchase helps hold the money as it grows so it doesn't leak out through overall spending accounts. Watching a savings balance go up and celebrating steps toward a spending goal also creates incentives for avoiding small purchases along the way.
Researching options for buying used is another way to save and to know the track record or history of the item. Including the family in the build-up to buying a car or taking a vacation has lasting value in that your children will see a pattern of working toward something. Avoiding big spending sprees and using a layaway plan for school clothing, for instance, also adds excitement and a sense of the value of the goods.
If you save more than 6 percent of your income, you are in the minority [source: U.S. Dept. of Commerce]. Few households have enough savings to cover the costs of an emergency or even a planned event such as a wedding, so financing covers the immediate needs. Taxes and funerals are inevitable, but cash at hand is typically not enough to cover the costs. In each of these instances, a bill and interest have to be paid.
Saving and planning allows your money to earn interest and builds an interest-free method of payment: cash. Having money taken out of your paycheck is a great way to get your hands on your own money before others do. You can pay your savings account and earn money in interest.
Bill yourself each month, and pay that bill first. Try allocating $50 to $100 off the top of any earnings and see if you miss it. If the amount creates too much of a pinch on your cost of living, try a smaller amount and build by taking another look at your spending. If you don't feel a thing, think about adding more to your bill.
A new designer movement is afoot. High-end department stores and chic boutiques still have a share of the market on name brand clothing, but the marketplace is expanding. Used clothing stores, consignment shops and general thrift stores carry impressive designer fashions at very affordable prices. Even some staples of the thrift business such as the Salvation Army have added designer sections for clothes shoppers.
Building a work wardrobe with quality pieces could mean spending hundreds for new shirts or suits, but the same quality, though used, items hang for the taking for just several dollars or more. Children's clothing and toys can be an especially good buy through thrift and consignment stores and garage sales, as barely worn items are outgrown and recycled through resale.
Finding treasure in the piles or on the racks is a fun way to shop if you enjoy a bargain and a frugal activity with family and friends. Filling bags at your local charity shop or from a neighbor's driveway can make your next trip to the discount store seem like a splurge, and it can remind you of the spending snares set to add to your cart through end-aisle merchandising and sale signs.
Cash is, in a sense, real-time. Paying with cash happens on the spot, with no further steps or future charges. Cash is also real time in the sense that when it's gone, it is gone. Withdrawing a set amount gives you something to work with when it comes to making buying decisions, and cash limiting each week or each month can keep your spending down.
Debit cards have replaced cash for many people worldwide. A benefit of debit cards is the convenience of using them as cash without having to make a bank or ATM withdrawal or having to write a check. Some downsides to using debit cards come in the form of self-control and theft control. Using cash allows for budgeting a fixed amount in real currency, while buying with a debit card pulls monies directly out of your bank account up to the limit of your balance. Debit cards also have fewer protections, and when stolen, they can be used immediately to make purchases and get cash back.
So many people desire a simpler life that marketers have caught on and created more opportunities for buying stuff. In simple terms: Buying into the idea of simplicity sometimes leads to buying more stuff to organize what we have. Even wanting less is a marketing target, so that "simple living" is an outward style rather than a true lifestyle.
Before you buy, think about similar things you have at home that are sitting unused, and shop from your own storehouse. Challenge yourself and family to use everything up and restock only what you need without being overrun with new household goods again. As with buying, maybe take a month to track what you use and don't use from what you already have, eyeing what you can get rid of and not buy again.
If it's hard to get to, creating a landslide of stuff when you reach for it, or is something you can't see, you likely won't use it. Getting rid of the clutter, stress and maintenance of having a lot of stuff lets you see what you have and pare down to what you love. Doing the same with bills prevents both material clutter and debt clutter.
If you are anything like millions of other people who make money, you may have a vision of those people who keep budgets as a different breed than yourself. There is an aura, and frankly, even something boring associated with talk of budgets and success at keeping them.
Fortunately, living on a budget can be second-nature and even enjoyable once you're set up to track your spending. Seeing what you have and what you pay out is a reality check, but closing your eyes to your debt doesn't make it go away: A budget can.
Numerous free budget outlines are on the Internet and in libraries. From simple one-page itemizations to multi-page bells-and-whistle spreadsheets, the options are innumerable. Spend some time finding a budget sheet or package that looks fun to you.
Guidelines from the experts can help in getting started; however, make adjustments up or down to fit your stage of life and personal goals. Recommendations aren't written in stone, but your budget should be. Plan for extras within the budget rather than outside of it, and once you have a budget, stay accountable to what you set for yourself. Make adjustments only for growing closer to a debt-free life.
Lenders don't ask your reason for wanting a personal loan. HowStuffWorks takes a look at some typical motivations.
More Great Links
- Associated Press. "How Much Should You Spend on Groceries?" MSNBC.com. March 15, 2009.http://www.msnbc.msn.com/id/29681240/
- College Board. "Trends in Higher Education Series: Education Pays 2010." College Board Advocacy & Policy Center. Sept. 30, 2010. http://trends.collegeboard.org/
- CollegeScholarships.org. "The College Board Estimates that it Takes 11-13 Years for a College Degree to Pay Off." Sept. 27, 2010. http://www.collegescholarships.org/blog/2010/09/27/the-college-board-estimates-that-it-takes-11-to-13-years-for-a-college-degree-to-pay-off/
- DaveRamsey.com. "Get Out of Debt with the Debt Snowball Plan." Aug. 1, 2009.http://www.daveramsey.com/article/get-out-of-debt-with-the-debt-snowball-plan/lifeandmoney_debt/
- Federal Reserve Board (FRB). "Board of Governors of the Federal Reserve System: Credit Card Repayment Calculator." April 21, 2009. http://www.federalreserve.gov/creditcardcalculator/
- Federal Reserve Board (FRB). "Federal Reserve Statistical Release G19: Consumer Credit." Sept. 8, 2010.http://www.federalreserve.gov/releases/g19/Current/
- Federal Trade Commission. "Knee Deep in Debt." Facts for Consumers. Dec. 2005.http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm
- Hamilton, Anita. "The New Trend of Used Clothes." TIME. May 31, 2007. http://www.time.com/time/magazine/article/0,9171,1627026,00.html
- Jones, Daryl G. "Personal Savings Rate Worse than We Thought." Fortune Magazine. June 30, 2010.http://money.cnn.com/2010/06/30/news/economy/personal_savings_decline.fortune/index.htm
- Khan, Kim. "The Basics: How Does Your Debt Compare?" MSN Money. Sept. 30, 2010.http://moneycentral.msn.com/content/savinganddebt/p70581.asp
- Kiviat, Barbara. "The Case Against Homeownership." TIME. Sept. 11, 2010.http://www.time.com/time/business/article/0,8599,2013684,00.html
- Martin, Andrew. "U.S. Reaches Deal in Credit-Card Antitrust Suit." The New York Times. Oct. 4, 2010.http://www.nytimes.com/2010/10/05/business/05card.html
- Rapacon, Stacy. "The Six Best Budgeting Sites." Kiplinger. March 2009.http://www.kiplinger.com/features/archives/2008/12/best-online-budgeting-sites.html
- Weston, Liz Pulliam. "The Basics: The Truth about Credit Card Debt." MSN Money.http://moneycentral.msn.com/content/banking/creditcardsmarts/p74808.asp
- U.S. Department of Commerce, Bureau of Economic Analysis. "Personal Saving Rate." Oct. 1, 2010.http://research.stlouisfed.org/fred2/data/PSAVERT.txt