Ask the Readers: How to Live Debt-Free?
Friday, 5th October 2007 (by J.D.)This article is about Ask the Readers, Debt, Real-Life
I will be debt-free by Christmas.
In just a few weeks, I will have repaid all my consumer debt. Only my mortgage will remain. It’s taken a lot of hard work and sacrifice, but the end is near. I’m wondering, though, if I’m ready for the transition.
For three years, I’ve focused on becoming debt-free. Many of you are making the same journey, and you’ve begun to e-mail me the same question: What’s it like living debt-free?
I assume that becoming and living debt-free require a similar skill set. Frugality is probably just as important to remaining debt-free as it is to reaching that goal in the first place. The concepts I learned while using the Debt Snowball can probably also be used to save for things like cars or new furniture. An abundant emergency fund seems natural, too, as do fully-funded retirement accounts.
But I worry about lifestyle inflation. I suppose it’s natural for a person to relax a bit once he’s paid off his debts, to allow himself a few more indulgences (though paid with cash rather than credit). How do you keep from reverting to old habits? How do you keep from spending too much?
How is living debt-free different than becoming debt-free?
I’m a little ways from becoming debt free myself, but I suspect the way you stay that way is you get rid of all the influences that led you down the wrong path the last time.
For example, if credit cards were your problem before, you need to get rid of them entirely - points and rewards be damned. It’s far harder to spend on credit if getting credit is a pain in the first place! Simply engineer your life in such a way that falling back into bad habits is very difficult because the tools to do so are inconvenient.
First of all, congratulations! You’ve nearly achieved a very big goal and created a great blog in the process.
You’re right, with your current frugal lifestyle you’re set up very well to do some real saving, but where’s the fun? My personal trick to beating lifestyle inflation is keep asking the same question: “Do I really need this?” but now, if the answer is no, ask “Do I really WANT this?” If the answer is yes, then by all means, buy it. Enjoy being able to afford it, enjoy the purchase. By now, you know the value of money and the real value of ’stuff’ much better than most of us, so I doubt you’ll overspend.
Whenever I catch myself mindlessly eating the expensive cookies I bought, I think back of my college days. You have a written account of your poorer times - if anything, you can always reread your blog. I sure hope you keep writing!
CONGRATS, J.D.! It’s a huge accomplishment, and one way too many people never even attempt, let alone achieve.
We did something similar a little while back and got rid of WAY TOO MUCH credit card debt my wife brought into our marriage. What was important to us was planning just as carefully, if not more so, for what to do once we were debt free as we did while we were paying it off.
It sounds simple and stupid to say, but we found it to be true — it’s in the plan. Be just as intentional about what you do with each dollar as when you were slaying the debt monster. Want to save for a new car? Fully fund retirement? Fund an annual vacation? Spend a little more every month on comics?
Go ahead — just plan for it. You talk a great deal about the importance of the psychology around personal finance, and I think that’s particuarly true here — the great news is you clearly have the discipline thing down, and by keeping it up you can accomplish some incredible things.
Since we killed everything but the mortgage, we’ve focused our efforts on expanding our house, which we’ll begin shortly. After we paid off our debt we did loosen up a little on expenses, but not much, and with the money we saved we’re in great shape to start the renovation.
Hope that small slice of experience helps. Congrats to you and your lovely bride again — and Thanks for such a great and helpful blog!
As a person who has been debt-free for years (not even a mortgage payment), I’d say it’s essentially the same as working toward becoming debt-free. If you want to stay out of debt, you have to live within your means.
That said, one’s “means” become a little more generous, because you don’t have to fork up a chunk of your regular income to creditors. On the other hand, for middle-class Americans the cost of living expands to fill all earning power. Still, extra money that would enrich a credit-card corporation now goes into a savings account, which can be used to buy indulgences and pay the plumber or the veterinarian without affecting month-to-month cash flow; then income from my little side business can go into the Roth IRA.
The vet charged $400 to put down the cancer-ridden greyhound and biopsy a skin lump on the German shepherd. When I gasped, his staff helpfully proposed I put the bill on the cuff. If I didn’t have that savings account built from the few extra bucks a month left over from my paycheck (that did NOT have to go to a creditor!), I in fact would have had to go into debt to deal with this. As it is, the bill will absorb 1/3 of that savings account. But at least, thanks to being debt-free and remaining moderately frugal, I can pay it.
Congrats J.D on reaching your goals. Ever since we became debt free a couple years ago, we really focused the extra money on investing.
So instead of thinking about what to do with the money, live the same lifestyle as if you’re still paying down your debt, but this time, put the money into investments.
FT
Good work JD. I’m following close behind you, with a target debt free date of February.
I think living debt free will be easy for me. Thus far I have heeded the advice of Dave Ramsey and plan to continue. Fortunately I am blessed to have a frugal wife (more frugal than me, and my friends make fun of me for being cheap!). We’re going to do some home improvement work, buy a few toys that have been waiting 3 years, but the whole process will be done in a responsible manner.
Dave Ramsey is not just about getting out of debt. He offers a lot of advice in his radio show, books and the FPU lessons about negotiating, being aware of the extreme nature of our highly marketed-to society, having power over purchase, and most importantly, considering the opportunity cost of spending money.
The last part is the key to how I will live debt free. I typically research my major purchases for at least a month, if not 2-3 months, in advance. I know everything I can about the product I’m buying, and I know whether I will get my money’s worth before I purchase it. Understanding opportunity cost and having power over purchase is crucial to living debt free, because it removes the impulsiveness from your buying habits.
I’m not completely debt free. I still have ~6K in student loans, and 1 car loan I’m paying off, along w/my mortgage. However, since the interest rates on those are lower than I get in my savings account, I’m in no hurry to pay them off.
You will probably have some life style inflation (I did). I also still use credit cards for just about everything, but I pay the bill off every month, and do it to get the cash back (in about a year I’ve gotten ~$800 back). But what I’ve done is to take the money I have extra, establish an emergency fund equivalent to 6 months worth of expenses. I also apply any extra (what’s left over from saving, investing, retirement, etc) into the mortgage to get it paid off even faster.
I think the key is to let yourself have a little bit of a lifestyle inflation. You’ve worked hard, and skimped to get out of debt. Reward yourself….just don’t go hog wild. Take some of that money that you were using to pay off debt, and save it…buy a nice TV or furniture or something. Indulge every once in a while. But I think the key is to take majority of the money you’ve been applying to debt and sock it away in investments (IRA, 401k, mutual funds, stocks, bonds…whatever). By doing that, you’ll be making even more money…but you’ll also be doing something thats worth more than money. You’ll be building security. Security for you, and your family. Money isn’t everything, but when you have enough that you don’t have to worry about how you’ll pay the bills if you loose your job, or someone gets seriously ill, you’ll have a great sense of security, and thus relaxation.
For the months prior to my paying off my car and finally becoming debt-free, I thought that waking up on the day that I no longer owed a balance on anything was going to be this wonderful, fantastic experience. “I don’t owe nobody nothin’” was running through my head in the weeks leading up to sending in that last check. In reality, waking up that morning felt just like another Friday at work.
Looking back about a year later, I realized that this milestone — eliminating my consumer debt — was just another step along a much longer journey, one that I can’t quite clearly define just yet. My best guess is that my own path is a mixture of prudent saving/investing, conscious consumption, and constant reminders that, while money is important, it’s not everything.
As for your question about lifestyle inflation, I handle it two-fold: I aggressively track each and every purchase to help curb bad spending habits, and I allow myself a reasonably-sized “fun fund.” While I track the amount of this fund as aggressively as the others, spending it doesn’t count against my core financial records in a negative way. So if I spend it all on comics and CDs, or if I decide to save up for some really expensive equipment like a new musical instrument or a concert and blow it all in one big purchase, I do it guilt-free. This is all done, of course, after liberally paying myself into various savings/investment accounts, and is done with full knowledge of the clutter that new possessions always create.
A big fat gratz, by the way, to almost making it to this milestone yourself. Be sure to make another post on “the day” and let us know what you experience.
J.D.,
Congratulations! This must feel absolutely wonderful to overcome such a monumental challenge.
The question I have is this:
Is the concept of living debt free lost on those who have never been in debt? Or, put another way, is living debt free more meaningful to those who have overcome debt?
Currently I have only a mortgage and a monthly car payment (ends in March 08). But other than that, I’ve never had any consumer debt. I’ve always paid off my credit cards, never taken out HELOCs or the like. And though I have a car payment, I don’t consider myself “in debt”. It’s just another monthly payment to me, like the electric or phone bills, except it will be ending in a few months.
To me, living debt free means really, actually being debt free. That every cent in my paycheck after taxes is *mine*, not someone elses. No car payments, no mortgage, no loans.
I can’t ever imagine being in debt like J.D. was, and having to climb out from under such a huge burden, so I can’t really fully appreciate the elation he (or anyone else) must feel after overcoming something like debt. Perhaps in another 26 years or so I’ll feel that thrill
For the time being, I guess I’ll have to live vicariously through J.D.
Seeya,
Paul
P.S. J.D. To celebrate, on the day you finally shed the debt-shackles, I recommend putting on Bad, from the Live Aid show and “throw this lifeless lifeline to the wind”
I think part of becoming debt free (and we should be debt free, except for mortgage, by the end of 2007) should mean that you get to be a bit more flexible with money and spending. We’ve been pinching pennies all year to pay off our unsecured debt and we are looking forward to not having to pay so much attention to spending and budgeting once we are done. On the other hand, we will have a year’s worth of spending data that will help us set a good realistic budget for next year. We will work on baby step #3, fully funding our emergency fund and we will also save for a baby. We also will work on saving up for some large purchases, a nused car, new furniture, some house projects, etc. We’ll also be investing, fully maxing out our 401ks and IRA’s for each of us and doing some other investing as well.
Most importantly, when we pay off our debt, we will do a happy dance, pop a bottle of bubbly and tell everyone (those that already knew about our 2007 goal).
J.D. — you can have those lifestyle indulgences that you mention — simply earn a high enough income so that you can “blow” lots of your income if you want, yet still have plenty of money for your other goals like building your emergency fund, paying off your house early, fully funding your Roth IRA’s, etc. Don’t forget that Dave Ramsey drives a Lexus and a Jaguar and has a sprawling vacation home on a lake. Yes, index funds are great, but don’t forget that the investment that people have built their greatest wealth from was their own small business. You’ve already launched your own enterprise, this magnificent business called GRS. Point is, I don’t see any reason why you can’t eventually be on the same level as Dave Ramsey or whoever. I mean, you have talent to burn, sir. So just stay focused on building GRS. There is nothing more important you can do than to build and build and build this site.
Congratulations!
I realize how hard it is to sacrifice to pay down a debt snowball and that you likely have other financial goals that you want to reach quickly, but…what’s the problem with loosening up a little bit?
As long as you continue telling your money what to do beforehand and making it work for you, there’s no reason you can’t loosen up your budget a little. Have a little more fun money, since you also now have more money to plow into savings and investing.
Personal finance is personal…so you might as well do something that works for you and will keep you on track instead of what you “should” do if it will cause you to lose momentum/interest.
My wife and I are debt free with only a standard home mortgage and have been living this way for the past 5 years.
With an annual (takehome) income somewhere close to $60k we’re able to live pretty decently but certainly not extravagantly. We make sure to treat ourselves to little things that we like (Warcraft, Netflix, occasional dining outs, etc…) as that’s kind of the point of living life day to day you know. (Not meaning that Warcraft is the point of life
Just the whole “A man can do nothing better than to eat and drink and find satisfaction in his work.”)
Anyway, I’ll tell you the odd thing that is hardest on us about living debt free. And that thing is saving. We’ve got no issue with going into regular “consumer” debt on things like clothes, gadgets, etc… But it’s mighty darn difficult to allocate enough money towards the various goals that we want to save for so that we may continue to live debt free. For instance, we want to save towards the following goals: Roth account, vacation account, college savings account for kids, 2 car replacements, and a future house downpayment.
When you’ve got around $800 left over at the end of a month, that $800 doesn’t go too far into growing those various savings goals.
But hey, it’s a better situation than being in debt and so I’m thankful to be in it. But don’t be surprised that once you’re out of debt you find yourself facing a new (but better) problem.
When I became debt-free I still lived as if I was paying off my debts, but instead put that money toward saving for specific goals. Over time, living within my means became a habit. By saving up for things instead of caving in to instant gratification that leads to spending more than I can afford, I can now indulge myself without going into debt. I use my credit card all the time, but I never charge more than I know I’ll be able to pay off in full when I get the bill. And because I’m still saving for various goals, I still hear the voice in my head that says, “would you rather buy this fancy new toy that you don’t really need or would you rather take a vacation in Orkney next year?”
Hmm.. figure out what it is that you really want, but weren’t able to do (or have) when you were in debt. Start saving for it.
For me it is travel. I am not in debt so about half of the money I save goes to my emergency fund and half to my “travel fund”. I am still a student but I’ve managed one or two weeks travel every year, for the past couple of years now. “Do I want a latte or do I want to go to Berlin?” works for me
Congrats on paying off your debt!
I see people ask this question alot of PF blogs, and it always perplexes me. Do you really not know the answer? It seems rather straightforward to me. You have done alot of work to get where you are. To review, if you are debt free you likely have:
1.) an adequate emergency fund
2.) a plan for retirement
3.) life goals (or at least a goal oriented mindset)
4.) your cash snowball every month.
The answer to me seems obvious:
Step 1: Fill any immediate needs with #4, address emergencies with #1, make sure #2 is on track and bolster if necessary. Use credit wisely, perhaps for rewards or similar.
Step 2: spend the rest of your debt free life contemplating and fulfilling #3, keeping mindful of where you came from and where you want to go.
Maintaining your debt free lifestyle should be child’s play for you at this point.
Also, a hearty congratulations!
To celebrate, on the day you finally shed the debt-shackles, I recommend putting on Bad, from the Live Aid show and “throw this lifeless lifeline to the wind”
Somebody has been reading deep into the archives at my pesonal site!
(The Live Aid version of “Bad” by U2 is my all-time favorite song.)
Congratulations J.D.! As some others have noted, you aren’t truly debt-free until the mortgage is gone, but you’ve definitely taken some huge steps by getting rid of all the other debts!
I’ve been debt-free (other than the mortgage) for a few years now, and honestly things don’t change that much, except my savings rate has increased as less money is going toward paying down debts. Other than that, it’s business as usual.
And icup, I like your “cash snowball” concept. Good name for it.
I read blogs like this one to get me to focus on saving, even though I have no debt. reading about others’ debt is a great way to keep from taking on any debt of your own!
What I meant to say was, go out and buy a Hummer H3 and a vacation in Tahoe paid for with all the credit you’ve freed up! You’ve earned it!
I find the hardest part of being debt free is the propensity to always try to save more.
You’d think at first this wouldn’t be a bad thing, but when you shift from removing debt to building wealth, you don’t want to shoot too conservative. In doing so, you start to limit the speed at which you can grow wealth and become overpowered by fear of losing what you have.
Sometimes you have to take some gambles so that you appreciate what you have more as well as break free from fear, and every so often, hit it big.
Hi J.D.!
Congratulations to you and your wife for getting this far!
I’m newly “in the black.” I’m staying there because I still have a bunch of financial goals I need to achieve. I can’t achieve those goals if I fall into debt again. I’m just as focused about saving for those things as I am about paying off debt so the inflation in lifestyle hasn’t had a chance to occur.
Way to go, JD!
It’s OK to allow yourself a few little indulgences once you’ve paid off your debt. The key, I think, is to focus that extra spending on the things that matter to you as a person - a hobby, creature comfort, whatever - while sticking to a frugal lifestyle in the other areas of your life. If you’re worried about spending too much money on those indulgences, you can always set a cap that you can review from time to time.
You can also set specific financial goals like you did with your debt repayment (”I want to have x dollars in my retirement account by Christmas next year”) to keep that extra money from burning a hole in your pocket.
Find cheap/free ways to keep yourself entertained - I spend when I’m bored. If you must buy new toys (gadgets are my weakness) buy them second hand, the difference in cost between a brand new lump of technology and a 12 month old lump of technology is usually huge.
JD,
WAY TO GO! I got there myself just last year. I have to admit the first couple of days it felt great. Then I did some thinking of what I really wanted in life. I came to the conclusion that I would like to retire early, VERY early. So that is how my goal to retire at 45 got started.
So now I’m still living mostly the same way as before, but the goal just shifted. So I still face the same problems as everyone else “Do I really need this? Or how bad do I really want it?”
Perhaps in your case your next goal will be to save enough money to afford to shift over to full time blogging.
Enjoy the freedom. You can now chose what you want in life, rather than having your debt chose for you.
Tim
Congrats!! I am totally jealous and wish that I could be saying we would be debt free at the same time you are. How exciting!
I think that you have had a lot of good advice. But really, what’s wrong with loosening up a bit as long as you pay in cash? I see nothing wrong with living a little as long as you can pay cash for it.
Our future budget (after debt is paid) is 10% savings, 10% spending for fun stuff, and 80% for living expenses (which can be broken down even more if you want).
I’m sure that it will be an adjustment, but what a wonderful problem to have!
Paul -
I was struggling with this post until I read your message;
“Is the concept of living debt free lost on those who have never been in debt? Or, put another way, is living debt free more meaningful to those who have overcome debt?”
I know that it is a little lost on me. I’m 29 and have never had a credit card or student loan, paid for my cars in cash and have rented apartments rather than take the risks associated with buying a house. It sounds exciting to not have to pay a portion of your income to someone else, but I can’t really wrap my head around how excited some people are. It reminds me of people who tell me “I’ve never been to jail” as though I should praise them. Last I checked your not supposed to go to jail and debt to me is just financial jail.
So to answer your questions. I don’t get the joy of “getting out of debt” but neither did I get the joy of “getting into debt” by buying more than I can afford.
- Joshua
Congratulations! I will say that the period right after I became debt free was psychologically more difficult than anticipated. I had no debt and yet it seemed as if I had no money either even though I was no longer paying anything down. There were a couple of surprise car repairs right at that period. Also there was a temptation to celebrate by spending money - money that somehow didn’t seem to be there.
It was great to pay the repairs straight off instead of putting it on a card, though. And by about 6 months of putting $ into savings I really started to see the difference. This started a virtuous circle of motivating me even more to save more. First thing I used the savings for was to fund a Roth. Then I took up skiing and saved ahead for trips and equipment. Then for house downpayment. Now it is for long term taxable savings with sub-accounts for a new car down the road and for mad money.
So the early months where it seemed nothing was happening was just a period of building momentum. Go forth and be in the black!
I cut up my credit cards and used debit only for about 5 years while building the savings habit and confidence in myself.
Congratulations, JD! That’s such a fantastic accomplishment.
I say first, treat yourself a bit. When I paid off college, some friends and I went out for dinner at a fancy-schmancy Italian restaurant. It was the best pear/romano ravioli I’ve ever had, and not just because it was well-made. I figure I put two years of savings into that pasta, making it all the better.
After that, I say keep up with what you’ve been doing. Record expenditures, save for the future, etc. But yeah - definitely don’t forget to reward yourself. Way to go!
P.S. Have you seen Rattle and Hum? The “Bad” version on that made me a U2 fan for life. He breaks into “Ruby Tuesday” at the end. Sublime.
Congrats, J.D.! That is truly fantastic. I have a ways left to go, myself, but I’m getting there. I hope to join you soon.
I have been debt-free (other than mortgage) for about two or three years. To be honest, living this way is tremendously easier than living with debt. My car payment used to be $330 per month, and a condition of the loan was having (expensive) comprehensive insurance. No car loan plus less insurance gives me a bit over $400 in additional disposable income every month, without working more hours or sacrificing any comforts or luxuries. When I was snowballing my way through credit card debt, every penny of income above what was needed for food and shelter was going into paying the debt.
Now, on a moderate middle-class income, I have a lot of breathing room. I can save for a new car, or buy a new dining room table, or travel, or do nothing. It is my choice, and that breathing room in the budget makes it possible. I really should be emphasizing savings more than I am, but to be honest, I have such a palpable sense of relaxation, after the years of stress and worry of getting here, that I am not very inclined to make any big changes at the moment. Right now, as long as every month I have added to savings, and not spent more than I can afford, I’m happy with that. Down the road, I think building savings will be a fun and challenging goal, but for now I’m comfortable with incremental progress.
But the question of how to stay debt-free is really important, because it is really easy to drift back into spending too much — I have watched many friends do exactly that, repeatedly (more or less the financial equivalent of yo-yo dieting). I do it by keeping my aspirations in line with my resources. It’s fun to look at the photos in those house-porn magazines like Dwell, but realistically a hillside mansion (and all the beautiful furnishings to go with it) in LA is simply outside of what I can afford. Instead, I aspire to a new couch from Ikea, or repainting the living room. If that is the sacrifice I have to make to stay debt-free, I’ll happily do it.
So as you go forward, and transition to debtlessness in the next few months, I think that keeping your aspirations (material and lifestyle) in line with your income really matters. If you can find happiness in that balance, you are totally set. However, I think a lot of people get out of debt by making big sacrifices, and deferring a lot of gratification, and living in ways that for them are very unnatural and unsustainable. Pay off the debt, relax the vigilance, and they start looking for that deferred gratification.
I have been able to stay just as focused on savings goals as debt reduction goals and from the sounds for your change in lifestyle, you will be too. I like the concept of a “cash or savings snowball” listed above. I’m now just as obsessively focused on my next savings goals as I was about reducing debt. Set some similar-sized goals as your debts were and tackled them piece by piece. Early retirement is our goal so I sometimes I think about about ours savings goals as one year early at a time.
Also, your goal to work full-time writing will provide another aim. How much do you want in savings before you comfortable jumping forth with that career? That’s a good tangible somewhat short-term goal.
Congrats! I remember that feeling of paying everything off and being in the black. Now comes the fun part- emergency fund. I’m close to 10K and have opened an IRA. Once I hit the big 10, I’ll fully fund the IRA. I am stumbling through learning how to invest in stocks at the moment. Once the emergency & Roth accounts are fat, it’s investing time. You will not go nuts and get yourself back in debt. You just worked too hard to get out of the hole and you will never want to go back willingly. I really enjoy charting my money market account on the fridge. It is a great motivator. I’m single, making about 37K net and putting about $600-$700 a month to savings (renter, 1994 car). I have a great social life, even with the 600 a month gone, and once your money starts compounding, you feel great. Keep it up!
I have two credit cards. I have used each once since Feb. Both balances paid off in full right away. This was just to keep the FICO score climbing. Enjoy your victory. One other tip- make a list of things you really need, or really want. Knock one off your list every month or two. You will budget for these items and feel no guilt rewarding yourself for these purchases.
Congratulations!!!
I’ve been out of debt for one year now, and though I’ve also had a bit of yoyo-ing in my past, this time I feel much more informed about how to prevent ever backsliding again.
I want to echo what Perries said — for me it took almost the full year to start to feel like I had some extra spending money. I work freelance, and the first 6 months of being debt free were a dry time and I wasn’t making much at all. Being really disciplined kept me out of debt, but I had nothing to spare. Suddenly I got a couple of good jobs in a row, and now I have some savings and am about to start a Roth IRA for the first time. Anyway, it was not an overnight dramatic change, but finally I’m feeling so much better and have started to buy some new clothes here and there, and go out to dinner occasionally without feeling so guilty (while continuing to be cautious, in case of future “dry spells”.
I guess I’m saying definitely do enjoy it, but in case the rewards seem to come a bit slowly, don’t get discouraged. It can be a gradual process…
Do go out to a nice restaurant or something to celebrate!
well done mate, but you’re not debt free until you pay off your mortgage. the bank owns your house, not you. if i were you i’d get rid of that last debt and then really have some fun. love the website.
What I do, and what has worked quite well for me, is to put up barriers between you and your money. My paycheck is directly deposited to my ING Direct account, so that it earns interest from day one. Then, once a month I transfer money to my local credit union to pay bills and for spending money. If a purchase presents itself that doesn’t fit into my spending plan, it will take at least 2-3 days for the money to transfer. It’s a built-in cooling off period and has kept me from making frivolous purchases on many occasions.
Of course, this also means that I don’t have my plasma television…
Can you smell what Marvel and DC are cooking?
It’s the smell of new comics!
Paid for with cash!
Without going into any debt!
Yeah, it’s evil, but hey - you have earned a new X-Men comic
I agree with MDJ. Now that you’re going to be out of debt, I’d turn my eye toward the future. The more you save and invest the sooner you’ll attain financial independence (if that is your next goal!)
I think it best to take things out of the realm of “what do I think” or even “do I need this” questions and, instead, use something more solid and substantial like numbers.
I make X.
a% goes to takes
b% goes to housing
c% goes to healthcare
d% goes to …
etc.
Your income/expenses expressed in a pie chart. Then, instead of going by how you feel or what level of frugal v. relaxed you are, when you do address a question like “can I afford it” or “do I really need (or want) this” you have a real basis from which to know the answer.
It whole picture becomes clearer pretty quickly. If you breakdown starts out like this:
20% taxes
15% retirement
20% housing
10% church/charity
…
Then you see that 65% is already accounted for and you still need health-care, education, transportation, food, clothing, etc., etc. It makes the whole process of spending, for entertainment, luxury, vacations, etc. academic.
[...] is justified, since debt is paying others for their money and therefore a loss. However, as J.D. pointed out at Get Rich Slowly, many don’t know what it’s like to be debt-free. Here are a few of [...]
I guess by your definition I am not debt free because we still have my student loans on top of the mortgage (that we put 20% down when we purchased).
When we paid the car off recently, we didn’t really notice a change because I kept moving the money over to a high yield savings account for the next vehicle. I would recommend you do that, so you can build up your emergency fund or save for a goal you and your wife have.
I am attempting to slowly build us up to the $4k that can be put in annually into a Roth. We already max out our company’s matching with the 401k’s. I do this annually when we get our raises. I also adjust our flexible spending. Although inflation happens every year it is my way of keeping us from not adjusting the lifestyle to gain crap we don’t need.
CONGRATS MAN. There’s no better feeling than a long term goal being set.
That being said, being debt free is wonderful. I have been debt free for over two years, and it’s given me more freedom to invest in other things, such as my 401k, my roth IRA, and my emergency fund. I am continuing to see my net worth grow, and it’s a wonderful feeling.
I have been able to budget and do a little traveling with my extra cash.. and enjoy some new toys.. like my new hdtv and ps3.
But at the same time, nothing changes when you are debt free. You still need the discipline to stick to your goals, because you can easily get off track. There are always temptations. I want to buy a new car, although I know it’s really not necessary at the moment. I want to do more traveling. I want to quit my job. Etc.. All these things are tempting, but I know I must stay consistent and stick to the script. Plus, you never know when an emergency may hit.
We became debt free in July. After nearly 4 years, 2 months, and $85,000. Our last debt in the snowball was Sallie Mae….
In June, I started to realize the same thing you are realizing. For me it was, this goal that had been on the horizon, out of reach for 4 years, was suddenly here. Let me tell you, it was almost a little depressing writing that check (not too depressing, though;o), because I realized that I had finally reached the top of the mountain in terms of paying off my debt. The journey was the hard part and what I will remember, not the view from above. It is almost like, “well, now what?”.
For us, we are keeping inline with the baby steps. We have about $3000 in the EF now and are going to pump it up to about $6-7K, which should be reached by the end of the year. After that, it will be on to funding retirement, kids college, etc.
In the months since becoming DF, we have finally upgraded our digital camera, thrown a nice 1st birthday party for our son, and done a couple other small things that we didn’t do while paying off our debt.
In regards to your question: We won’t go back to our old habits, because of the struggle it took to reverse the damage. Period. Now, we don’t care what kind of car we drive. I drive a 1996 Explorer & the wife has a 2003 Taurus. Both paid for of course. We don’t have to have an iPhone to get by. Nor do we have to have cable. We are going to get raises in Blow Money, Clothing Money, Gift Money, and charitable giving, but other than that, once our EF is done, we will continue on our path of being wise with our spending decisions. That is how we will keep from spending too much. If there is something we want, we pay cash or save up to pay for it. The same as trying to become debt free, only the goals change. We will determine our goals & an action plan, then work towards them. Best of luck & congrats on this milestone in your life…
Great job, J.D.!
The only debt in our family right now is our mortgage, and my wife and I are both pretty frugal. I think the hardest part of living debt free for us is setting a spending limit on something we know we need. If you can afford high quality, why not buy it?
Example: our new house doesn’t have enough kitchen cabinet space. We looked into adding a matching full-height pantry cabinet and were quoted over $4000. We looked at some other non-matching options, but it was tough because we knew we could buy the matching cabinet if we really wanted it (with money from savings). In the end, we decided we really wanted the matching pantry, but my awesomely diligent wife was able to find it for just over $2000.
It just means being careful when spending and being willing to put in the extra effort.
I liked what Katie said: I have been able to stay just as focused on savings goals as debt reduction goals and from the sounds for your change in lifestyle, you will be too.
It’s true. Think of what your financial goals are and be just as aggressive towards them as you are towards the earlier debt-free goals. It really helps you cut back the unnecessary spending, too. When it comes to making purchases, stop and think: Which is more important to me? Spending money on this or reaching my financial goal?
While you shouldn’t live in a way that impedes your happiness, it’s even easier to live below your means when you think of why you’re doing it. Owning 100% of your own house, buying your next car in cash, not feeling dependent upon a paycheck, retirement, etc.
I listen to some well-paid coworkers talk about how they are living paycheck to paycheck and realize that my life is very stress-free because I don’t need my job next month or even all of next year to survive.
Enjoy living debt-free and definitely start hacking away at that mortgage (or balancing it out with investments)! Congratulations, you deserve to celebrate. Go ahead and post about it every day if you wish, I wouldn’t mind.
oh yeah.. and enjoy yourself and buy some new comics bro! you deserve it!
A book I read on the subject says that you could apply the extra money towards paying down a mortgage or building up savings and investments.
My suggestion would be to sock away at least 50% of what you were paying to credit cards in order to build wealth. That way, maybe you can retire some day before your eligible retirement accounts become available for use (if that is your desire). I think then you could start funding some ‘dream accounts’ such as big ticket purchases, fancy vacations, etc. You’ve earned those indulgences.
That said, I am just starting the journey down the debt elimination road…
This reminded of Shawshank Redemption with regards to inmates not knowing how to live their lives after being institutionalized for so long. We, too, will have our debt paid off soon after a long, focused effort and I’m looking forward to seeing that “asset” column in the net worth spreadsheet start climbing. Congrats and I enjoy the blog!
One way to not be tempted to inflate your lifestyle after emerging from debt is to have new goals. Saving for retirement and paying your mortgage off early are worth pursuing.
It was such a relief when I finally had all of my credit cards paid off! For the first time in a loong while I was able to sit down and calculate that I had a positive net worth. It’s ok to treat yourself once in a while with something you really want (do the research and find the best price) but it is important not to fall back into bad habits. What I did was take the money I was pouring into credit card payments and pay myself instead through my ING account.
My wife and I just recently became debt free and we have found that living on less than you make and continuing to set savings goals keep us on track.
In short, continue to make a plan for your money. Only now, you get to decide where it should go (car, home addition, stereo, roth, etc) rather than sending it to someone else. That is the FUN part!
use some of that money that was going to the debts towards investments!
I’ve been reading GRS for about a year and I guess this is as good a time as any to actually post something!
I’d like to add my congratulations to the others already out there - I’ve never been in any serious debt before, but I’ve watched friends lose sleep and miss out on their potential as a result of it. It’s also quite inspiring to see the figurehead of this blog practising what he preaches and achieving results.
My own contributions - A little about myself first. I’m 24, I’m Scottish (a race pre-naturally suited to being cheap, or so the stereotype goes!) and I’m a trainee solicitor. I currently make £22k a year (double that for USD) and I’m debt free (I rent just now). I’ve used GRS to help fashion a budget and start my adult financial life on the right foot (massive thank you for that!), and as a result of being frugal combined with having no debt I often find myself with a cash surplus come the month end, sometimes as much as £400 (this is *after* a monthly contribution into a cash ISA - this is very similar to your IRA’s). When you finally clear your debts you will likewise suddenly see this surplus that wasn’t there before, and the question will occur “what do I do with it?” Personally I like to take a ‘one on, one off’ approach - one month I’ll take my surplus and just treat myself - imported beers, bourbon, new shoes, video games etc. Then the next month I’ll add it to savings, above and beyond the usual monthly contribution. Of course this is less efficient than putting it *all* into savings or investments every month, but then again if you don’t take the time to enjoy your earnings now and again what was the point in getting a job beyond the absolute basics?
All the best, and I hope you mark the last debt payment with a nice dinner or something! You have a birthday every year, but maybe only once in your lifetime will you achieve a goal like this.
I just paid off my last credit card a few weeks ago. What a relief!!! I rent so I don’t have a mortgage, but I do have one auto loan left with 4 years to go on it. I’m torn between paying that down as quickly as possible or taking the extra money and investing it.
I’m already maxing my 403(b) and my Roth IRA. So, where I am really torn is should I buy a house, should I be investing in the traditional stocks and guaranteed investments, or should I purchase a house and have that lingering for 15 - 30 years. There is only so much money to go around, what to do? what to do?
My goal is to retire in 13 years at the age of 45 not at 65 or 67. I see too many people work until they die; I don’t want to be like that. I can’t use my retirement money until I reach the age of 59 1/2. So my goal is to accumulate enough wealth that will last me from 45 to 59 1/2.
“Is the concept of living debt free lost on those who have never been in debt? ”
Maybe. I understand how it feels given that I paid off my mortgage and it feels great. At the same time, I don’t get the difficulty of remaining this way provided no pending educational expenses like a medical school and barring huge medical bills.
The only debt I’ve ever had was mortgage (paid), a car loan taken around 1986 and paid 3 or 4 years later, and a couple of very small (under $1500 total) subsidized student loans that I simply paid in full a few months after I started working. Since then I paid cash for (new) cars. I’ve never carried a balance on a credit card and I used them since 1983. It has always seemed totally ridiculous to me to pay more in interest than I could safely get in a bank -why throw money away? I’ve also never seen any major difference between a credit card bill and a telephone bill or electric bill. Don’t pay it in full and bad things will happen.
Funny, but I’ve never thought of myself as frugal because if I really want something I buy it (within reason and always within my means). I’ve never even kept a formal budget or allocated that much money for this or that much money for that. If I’ve always brought my own lunch to work, it was because I’ve liked my own cooking better. I always managed to stay below my means without a formal budget, because I’ve never really needed things I couldn’t afford.
I think the simple secret to never being in debt is to always keep in mind a simple truth - if you borrow money you always have to pay it back and with interest. If one really understands this, one shall never be tempted of buying things one cannot afford.
Beyond that, I usually approach purchases as Yinna said - “do I need it”, “do I really want it”. Also, “is it worth the price”. With clothing and jewelry - “where would I wear it?”. I usually have an idea of how much I am willing to pay for what, and my concepts of what is cheap and what is expensive changed by much less than my salary.
With major purchases, I research the features, quality, prices; come up with the list of features I really want and the price I am willing to pay and try to get my maximum price and my minimum requirements to match. Then I try to find a better deal - on the internet or stores. Also, unlike many Americans I am usually a bit reluctant to throw away good working things. I think this is cultural as I haven’t grown up in the US.
hubby and i are in the position of having all debts, including mortgage, paid. it’s cool not to have a house payment.
Joshua - mortgage payments come to an end, but rent never stops. Have you considered buying a house?
my next goal is to snowball money for new cars. i suspect hubby’s truck has not long to live. And get the EF back to where it’s supposed to be.
and hammer at retirement. on a teacher’s salary, this will get interesting.
Congrats, JD. I know how hard you have worked. My husband and I have been debt-free twice. We had to go into debt after the first debt-freedom day because of a drawn out family emergency. (Our financial situation would have been a lot worse if we had gone into it in debt already!)
After the second effort, we decided we wanted more daily joy, so we increased some of our charitable donations and every once in a while buy some art from an artist we have met in person (double joy of seeing art in progress and getting to have it in our home.)
Spurred by all your cries of, “Doggone it, J.D., live a little,” I decided to splurge on a Wii game. That’s right. I ordered Dance Dance Revolution. Heh. I’ve played the game twice before in arcades. I suck.
And browsing through the Amazon listings, my jaw dropped at the games coming out this fall: Guitar Heroes III, Super Mario Galaxy, Super Smash Bros, etc. Looks like I’ll have an outlet for a little bit of my freed cashflow.
Great job on your soon-to-be-eliminated consumer (i.e., bad) debt, however “debt free” is a bit of a misnomer since you still have a mortgage. That said, if I were you I would ratchet savings to increase retirement contributions, emergency funds and/or pay down the mortgage faster. Good luck!
J.D., it’s easy - just set new financial goals. Want to fully fund a certain retirement vehicle? Set that goal. Want to pay off your mortgage? Set that goal. The important thing about your goals is that you make them measureable and with limits - dates. You will feel the same “fervor” to pay these “debts” down as you did with your credit.
[...] That leads into an article I caught my eye this week. J.D. asked his readers “How to Live Debt-Free”. [...]
Since I just graduated college last May and have only been in the working world for 4 months or so, it’s easy for me to avoid lifestyle inflation and debt. At this point, all I have in terms of debt are my student loans (so called good debt). But through reading this site and starting with a good financial understand, I hope to avoid future debt. Congrats on making your way back to solvency and keep up the good work!
My wife and I knocked out 16K in consumer debt in our first year of marriage on one salary. Since then we have been able to buy a house(10% paid for) and save six months of finances in two years. We have found that our frugal habits stay with us but that we have relaxed the budget a little and do a few more “fun” thing throughout the year. Right now we are planning a weekend trip to Hilton Head, SC.
A few have commented on the mortgage thing, but I do think that for all intents and purposes, the mortgage can be regarded as “accommodation expenses” rather than as a huge and overshadowing debt. I mean, even if J.D. didn’t have the mortgage, he’d still be paying for a roof over his head in one form or another.
Consumer debt is a different thing altogether.
CONGRATULATIONS, J.D.! I really look forward to reading your big post on the big day. Not long now!
Congrats! I believe it has all been said! Haha - I am envious and I would think the main point is to have continuing goals. I think of a sports star - I am sure they dont ever say - well I reached my goal - time to go watch some TV. NO - they set a new goal! So set a net worth goal or a retirement goal or cash for a new car. Personally, I have found great joy in finding the lowest price - its a really fun game!
Now that you’re not paying interest (except on your mortgage), saving should become a lot easier, assuming you don’t permit your lifestyle to drift upwards.
Some investment accounts (like my Scottrade one) now feature a checking-account feature if you have more than $5,000 in equity, and when I reach that mark I’m going to apply. Then I’m going to start paying minor household bills like the $30-ish Water & Sewer bill out of my dividends. Equating investments with independence this way will be a powerful motivator, I think.
“A few have commented on the mortgage thing, but I do think that for all intents and purposes, the mortgage can be regarded as “accommodation expenses” rather than as a huge and overshadowing debt.”
That certainly is one way to look at it: unless you’re rooming with Mom & Dad, you have to pay a huge chunk to someone to cover housing–and a renter is really just paying someone else’s mortgage.
If you can afford the cost of upkeep, buying a house is a good way to go. Especially if you can afford a 15-year mortgage and still have a few dollars you can pay toward principal every month or even every few months. You’re paying on a value of X dollars, but over time the actual value of the house is X + Y dollars, so that the closer you get to paying off the mortgage the more the debt morphs from liability to asset. In addition, if you have a fixed-rate mortgage the payment is made in 20XX dollars, making it likely that in 20YY, between pay raises & the changing dollar value, your payment will be relatively more affordable.
I paid $100,000 for my last house, paid it off quickly by applying extra savings and every windfall to principal, and sold it nine years later for $211,000, after about $40,000 of improvements. Not a bad gain, considering that one way or another I had to pay for a roof over my head.
My present house is paid for. The next house, for retirement, will cost about $30,000 or $40,000 less than this house, and so I will pocket that money to enrich my retirement lifestyle.
So, if my experience is typical, it looks like buying is better than renting as long as you stay within your means….that is, don’t get a McMansion and avoid variable-rate mortgages.
I’ll second the congrats that everyone else has given! I have been debt free for about 8 months now. Nothing has really changed, but it is nice to not have to think about when a payment is due and to know that I’m not throwing money away on interest but instead have interest working for me. Personally, monitoring my networth in Quicken is a good motivator for staying frugal. I like seeing it steadily increase, plus I have things that I’m saving for in the next 3-5 years. You are now ready to really focus on saving and investing. It’s a much nicer feeling to be living frugally in order to make your future brighter rather than living frugally because you are indebted to credit card companies. Whenever I explain frugal living to my friends, I always use a football analogy. Living frugally and reducing expenses is the defensive side of the team and investing and earning more is the offense. You need to do both to have a great team and improving either side will help the team overall.
The #1 key for me was to use my debit card for all my purchases, including very small purchases. First, since the money is immediately taken from my account, there is no sense of fear that I’m going to be spending more than I have — a feeling that’s taken a long time to get rid of after spending years purchasing with credit cards. Second, I can track everything I spend. I only spend cash at the few places that still won’t take debit cards, which means I can go 2-3 months before I spend even $100 in cash.
I’ve lived like this for the last 4-5 years, and I’m now slowly going to start purchasing with a cash back credit card and keeping the money in my high-interest savings until I have to pay off the balance. I’ve gotten better at tracking my budget and I’m very focused on vehicles that make me money, so now is the time to try this method. Using my debit card has been a great money management tool for me, but now that I feel I have more control (and have a history of not getting into debt that I can trust), I want to start earning money on both my purchases and the grace period the card provides. I can easily earn/save $1,000 a year doing this — probably more. That’s a lot of money for doing nothing more than responsibly monitoring my spending. Of course, this will only work if I never, ever have to pay interest on the card, so that’s why I am going to take it slowly.
The other thing I do is put a small portion away every month into what I call a “home” account — it’s what others describe as “fun fund.” It’s for purchases I do not NEED and cannot justify or rationalize other than that it’s something I WANT… so I have a fund for when those purchases come up. It’s not much, and I also use it as a buffer if I overpurchase on books and music as I am wont to do, but it’s a great pressure valve for me to buy things I can’t otherwise justify — and that keeps me out of debt.
One thing I’ve found I had to be careful about is other people telling me how I should be spending my money. For example, even people I consider responsible with their money have been encouraging me to get a new-used car. I have a 1997 Saab with 96K miles that is in perfectly good shape. I spend $1,000 a year or less on maintenance and I’m not in a huge hurry to replace it. However, most people cannot imagine driving a car that is 10+ years old. My friends/family know I have savings, make a reasonable living, and just expect me to be replacing my car. Their comments, I admit, sometimes make me think, “Hey, maybe I do need a new car.” But then I drive mine and realize that I absolutely do not need a new-used car. If I can wait another year, or two, that’s more interest I will earn on the money I’ve saved to get a replacement. Beware of people who think they know how you should spend your money once you’re no longer buried in debt!
Once your debt is done, you adjust your budget once again to accommodate a full 401K, TSP, IRA etc.contribution (i.e.$15,500 TSP-401K /$4K IRA in 2007) for each person with access to one (i.e. significant other #1/significant other #2). Open ROTH IRA’s with your on-line stock trading account and place an additional $4K in each. Join the AAII via their website (www.aaii.com) for $39/yr. Learn about stock analysis from AAII (you can buy all of their soft-covered books for around $60). Run their site’s stock screeners. Go to MSN.com, Money section, stock screeners, and run their pre-configured screens. Choose five stocks and get to know them using a home page like Yahoo! that continuously feeds news stories about them to your home page. Choose a buy-in point for your favorite stock and either participate in their DRIP (Direct Re-investment Plan, AAII has a list) or buy them through your on-line account, using your ROTH money (no taxation on gains, so you don’t have to worry about short term vs. long term gains tax rates).
Track everything with a spreadsheet, continue to explore and read about finance.
Being debt free….
There’s a lot of overhead that you won’t have. You can work at the same pace and stick it away, or slow down to take a breath. You could even employ yourself although that reflection in the mirror can be a real taskmaster.
It’s a new horizon ahead. More options.
I look forward to reading about your debt-free life, in a few months!
I plan to live generously–giving money to support things I care about–while at the same time building some financial security and enjoying my life. But enjoying doesn’t normally mean buying for me…which is handy.
Once you are debt free, divide some or all of the money you were putting into paying off debt into payments to savings, investments and retirement accounts. Then automate the payments so you don’t slip.
Congratulations!
[...] Rich Slowly: How to Live Debt-Free. JD will be debt-free by Christmas and asks… what next? Yay [...]
That’s such a good question. I’ve been so busy concentrating on getting out of debt. It never occurred to me what life would be like without debt. I bet a huge burden would be lifted from my shoulders! I hope not to make the same mistakes to get back into debt. I’d probably squirrel more money into investing, savings, traveling, retirement, and financial knowledge. I’d loosen up my spending from 5% to maybe 10%. I won’t feel guilty about my purchases then. Congratulations! You’re an inspiration!
CONGRATS!
I went debt free (absolutely no debt, not even a mortgage) about 3 years ago. I down sized my life to a rental and will not buy a house or land until I can pay cash. I pay credit cards off every month, the car is paid off.
I maintain my frugal lifestyle, work toward more simplicity and save, save save. Of course, I’m also headed to my 3rd trip to europe in as many years. My companions and I travel frugally (no starred hotels…we rent vacation apartments or other creative locations as a group) and have great times meeting local people at the market.
That is all saved for and paid ahead of time. I have enough savings to replace my vehicle with cash. Enough to cope with foreseeable dr. bills.
Living debt free HAS made a giant change in my life. I’m no longer chained to my job. I work there because I choose to work there. I have savings incase I need to quit or get fired. I know I can meet my expenses every month.
This has reduced stress and given me time to pursue many more interests and travel and to reassess my priorities.
Happy Travels in Debt-free land.
Congrats on being almost there! I hope you’re planning to celebrate when you get there
I’m almost there, too. All I have left is the mortgage, and that’ll be gone in under a year. I don’t think my life will change much (I just blogged about this the other day, actually), but I can already taste sweet freedom just around the corner.
[...] JD talked about living debt free. [...]
Um, okay people, he’s going to live debt free. So what? I’ve always lived that way. Your goal now is plan for retirement, establish a stock trading account, and start earning real ‘disposable income’. You are finally where most everyone I know was, at the age of 25. Congratulations. Now get in the real game.
http://www.fineartofresurfacing.blogspot.com
you are finally crossing back over the starting line in the game.
the key is to always have a bigger goal you are saving/working towards, then your lifestyle will not inflate to swallow the newly disposable income.
and not retirement, beyond that. or if that is all you have, make it sooner. every $200 you save brings it 1 day closer, or whatever.
[...] dieters — people who’ve lost 30 lbs. or more and kept it off. And in reading a recent Get Rich Slowly article, I realized that the same successful principles these people follow are the same ones that will get [...]
“One thing I’ve found I had to be careful about is other people telling me how I should be spending my money. For example, even people I consider responsible with their money have been encouraging me to get a new-used car. I have a 1997 Saab with 96K miles that is in perfectly good shape. I spend $1,000 a year or less on maintenance and I’m not in a huge hurry to replace it. However, most people cannot imagine driving a car that is 10+ years old. My friends/family know I have savings, make a reasonable living, and just expect me to be replacing my car.”
Yeah, I get that too. My brother is always incredulous that I drive an old car and have a 24″ TV. My car was 10 years old when I bought it, and is now 15 and going strong. I have no intention of replacing it, although I have been sort of mentally coming to grips with what a year-old Yaris would do to my savings account. He thinks I should be driving a Lexus.
The thing is, I spend money. Probably more than I should. I bought a Nikon D80 in the summer and I’ll be taking a traincation with my girlfriend over Christmas. I think it’s important to differentiate between things you really want and things other people think you should want. If it’s something you really want, it’ll alter your life somehow; it’ll either make your life easier or make you happier. A new car wouldn’t make me any happier, although it might for some people.
re: the old cars…I have a friend in that EXACT situation. He has a 10+ year old Saturn that is just a little shabby but working perfectly fine and his friends (myself included, I admit) all keep asking, “When are you going to trade that baby in?”
He’s being very good about tracking his expenses for the car and comparing them to what he might spend on a newer car, to see when it makes financal sense to upgrade. The “happiness” factor doesn’t really factor into it because he is, as he says, “not a car person”. For him, it is just a way to get from place to place.
BTW, my sister bought a Yaris last year and loves it. Also, there was a recent article somewhere about the least expensive cars to own (purchase, maintenance, gas, etc.) and Yaris was near the top, along with the Corolla. If I was to get a new car, the Yaris and the Lexus line make my short list, too. Unfortunately, my current car is only 4 years old and I can’t justify dumping it yet!
i don’t think being debt free feels any different than being in debt. It is just different. you are paying off for your future rather than your past. until you reach your objective where you no longer need to save, you are still living the same life. instead of worrying about how much debt you have left, you worry about how much savings you have left to save.
the good thing is that I don’t feel wealthy.
[...] J.D. over at Get Rich Slowly recently asked his readers How is living debt-free different than becoming debt-free? [...]
I put my ideas down here
http://financinalfunkandpain.blogspot.com/2007/10/savings-snowball.html
How is living debt-free different than becoming debt-free?
If you are rational (and fortunate) it should not be different at all.
In my early 30s I lived paycheck to paycheck, had no assets to speak of, and was $20K in debt. At that point I chose to change that. I did so in the usual and most uninteresting way.
I moved to a less expensive apartment. I stopped eating out (or eating take-out) every night, and started cooking my own meals a majority of the time. I found ways to buy the luxuries I enjoyed more cheaply - it is easy to find ways of spending 20-30% less on many things things that bring you pleasure like wine and good food. I reduced the size of my wardrobe by spent more on each item - saving money because the clothes lasted longer and looked better throughout their useful life. Through these frugal ways I devoted 20-30% to paying down debt and was debt free in several years while enjoying my life no less.
Since I was devoting so much of my income to debt I decided to keep things the same in phase 2. I opened 401K and IRA acounts and maximized my contributions immediately. I had a little bit left over and opened an account for savings. Since I knew I was still bad with money, I decided to play a trick on myself. I set up my financial accounts to make it appear that my salary was mine to do with what I pleased, but did so in a way to disguise my income.
My employer used direct deposit into a money market account. This account used automated bill payment service to make deposits into my regular checking and savings account every 2 weeks. This last set of accounts was used for ATM transactions, and for paying all of my bills. Income into this account was my “salary”. I had to live within my means just like I aught. However, it was like I did not work for my employer, but for a fictitious employer. When I got raises or bonuses they went into my fake employers money market account and did not appear in my salary - they were left to build my savings faster.
Once a year, I gave myself a raise by changing the amount of the bi-weekly salary that went into my personal bank accounts. My income kept rising, just a bit more slowly than in my real-life job. I never felt that I was scrimping because my virtual job was increasing my virtual salary faster than inflation. It took my about 2 years to pay off debt, and another 4-5 years to build up emergency savings and open a brokerage account and start investing.
Now, my fake employer (my emergency fund money market account) kept making deposits for my “salary” but also started making deposits in my investment account. Again, I was tempted to spend more as I started building assets. However, I was still able to limit myself to my virtual “salary”, and though I treated myself to slightly larger “raises”, this still only happened once a year and I could do so rationally without feeling too tempted.
I had a couple of windfalls along the way, an unexpected gain, and a severance package when one of my employers went under. However, these benefited my fake company, and never appeared in my virtual salary. Thus I increased my assets and did not suffer any loss.
Now, 15 years after I started, I have a modest amount of wealth. I passed $1M a while back and am nearing $2M. My income from investing is now larger than what I ever earned as an employee. However, my long term goal has remained unchanged, and my way of accomplishing it is just as useful. My goals are to be financially independent (not tied to any external source of income) and rich (having a reasonably high disposable income).
As most of you know, being rich is the enemy of being wealthy. The road to wealth is simple. Keep expenses (and the effects of inflation) beneath income. It really is that simple. The larger the difference between income and expenses, the faster your wealth will grow.
Now, I am at a point where I could retire immediately. However, once I stop devoting many hours per week toward generating income, I will want to spend more time doing things which raise my expenses - travel, enjoying various hobbies, etc. I also might have insufficient assets if accident or the economy or my portfolio significantly affect my outcome. Thus, I should delay my retirement for a longer time.
My virtual employer is just as useful as before. My goal is still to have as small an income as possible and not feel deprived. My goal for retirement income is about twice my current virtual salary. Once the retirement income I desire is less than 3%/year of my investments my time will be my own.
I will be richer because my virtual salary will be much higher (about twice as high) than what I am used to. I also will be wealthy because my income will no longer be linked to how I spend my time.
As you can see, though, my life and my actions did not change either when I crossed the line from debt to savings, or when I crossed various milestones on the way to financial independence. I still lived within my means. I use credit daily, but pay credit cards in full each month. I increase my salary each year and am allowed to spend it as I please.
However, I structured my finances in such a way that I was never tempted to treat bonuses, tax refunds, raises, or other increases to income or wealth as if they were my own. My virtual employer (me) kept me happy enough on a slowly rising income, that I truly was never aware of any hardship.
Like the author of comment 86, Tim, said: “the good thing is that I don’t feel wealthy.”
He hit the nail on the head. If you play you cards right, you will experience a slow and steady rise in income over time. You will enjoy your life along the way. But you will not “feel” either wealthy or as if you are enduring hardship. You should never feel wealthy at all until you actually are wealthy enough to accomplish your goals.
That’s my take it on it. I started with less than nothing, and lived slightly above my means. I redefined my means, and then lived within them. I won’t lie to you, for the first year or so I did find this difficult to do. However, once I got over that humped, it seemed easy. It actually was all uphill from there since for over 10 years my savings as a percentage of real income was increasing each year. However, it felt all downhill (effort wise) since my fictitious salary did rise slowly and steadily each year.
The only emotional hardship and will-power occurred when I sat down each year and decided how much of a raise to give my self in the coming year. As a boss, I was sometimes a real bastard. My virtual employer (me as boss) once gave me a 6% raise in a year that my real employer (the company I showed up at 5 days per week) gave me a 12% bonus and a 20% raise! However, he (me) was right, and and I did enjoy the extra few hundred a month in virtual salary and never missed the extra income since I never experienced having it.
Anyway, sorry if this was too long, but I thought I would share my experience.
[...] I was just mentioning how so many things I’m finding are fluff, and then I found what I consider a diamond in the rough. What’s funny is that the large value I just got wasn’t from the blog post itself (which was fine), but from one of the comments. [...]
You’re only half way there. After becoming debt free, you need to accumulate an appropriate amount of savings.
I lucked into a good chunk of change from a real estate deal, and was thereby able to leap straight to being debt free with money in the bank.
The best part is being able to handle unexpected expenses easily. When you live paycheck to paycheck, having a $1800 medical bill dropped in your lap is terrifying. When you have no debt and appropriate savings, it’s merely annoying.
[...] about. I encourage you to subscribe to my RSS feed. Thanks for visiting!Recently I wrote about the transition from “becoming debt-free” to “living debt-free”. One reader e-mailed me some advice that I felt did a good job summarizing what everyone had said. [...]
Congrats on your three year journey.
In February 2004 I was facing $32,056.61 in credit card debt. Yes, that figure is burned into my brain. I also had a credit score of 560. After getting on a debt payment plan, I set a goal to be completely debt free in five years. November 4th of this year will be my final payment.
I have already setup an automatic deposit from my paycheck, that is $50 more than my bi-weekly payments were and I won’t miss it since it was already going out.
Living without the safety net of a credit card and using only a debit card, has forced me to spend much more wisely and I get to thumb my nose at the banks. I paid off my car early as well and that payment was added to a savings plan over a year ago.
I now live like the money I put in savings and investments, is out of reach and not to be touched… November 4th will be my Independence Day
[...] One commenter wrote: I don’t think being debt-free feels any different than being in debt. It is just different. You are paying off for your future rather than your past. Until you reach your objective where you no longer need to save, you are still living the same life. Instead of worrying about how much debt you have left, you worry about how much you have left to save. The good thing is that I don’t feel wealthy. [...]
[...] wanted to get out of debt. Now that my consumer debt is nearly gone, I’ve spent a lot of time wondering what to do next. I was worried that I’d lose focus, lose direction. That’s not going to be the case. [...]
Hi J.D.,
New, awed, inspired 57 y/o reader with $40K for retirement and a “clerk” job. (Oh how the dot-commers have fallen.)
How about putting your extra money into http://www.kiva.org instead of cranking the lifestyle upward? It will pay you back forever.
Best wishes to you, and thanks for your work.
So….how’s it feel?
You mention that you would be debt free but you would have a mortgage. This confuses me, maybe I’m being something of a purist. Please forgive my ignorance, I’ve never been a “home owner” or even someone who’s obtained a mortgage to “own” a house. I rent.
One of the things I just don’t understand is how everyone consideres a mortgage to be separate. Isn’t it debt like any other? Even if your house is worth more than you owe, you still owe. Owing means it’s debt, doesn’t it?
So why wouldn’t you keep your lifestyle the same and start throwing your very large snowballs at your mortgage? Why wouldn’t you choose, especially at this point, to consider a mortgage to be debt and declare war on it?
Hi,
I am in debt about $15,000 and this happened in a matter of 8 months. I had just recently moved from Wisconsin to Virginia and with selling my house I was able to pay off a lot of debt. I even paid off my car. Then I was in a car accident which totalled my car. I had a few emergencies which have increased my credit card debt and yes I am at fault I have made some wrong decisions financially. I have three kids, 14,13, and 8, and an ex that I am taking care of. The money seems to be going out faster than I can make it. I understand what you are saying with the three steps and all but what do you do with the constant unexpected events. ex… Kids, school events, afterschool events, medical bills, etc…..I just feel that everytime that I start to save some money I have to take it right back out because something comes up… I can’t take on another job because of all the responsibilities that I have with the children and the sick ex… What advise do you have for me.
Lillian: Comments in a blog post aren’t a very good way to get personalized advice - J.D. and the readers of this blog aren’t going to know enough about your situation to give you meaningful help that’s tailored to your situation.
A couple of things come to mind, though:
- Unexpected events are the exact reason everybody should have an emergency fund.
-”Kids, school events, afterschool events, medical bills” are not usually “unexpected” events. If you have kids, you know they’re going to go to school, and you know that there will be expenses associated with that.
-Talk to your children and your ex, and determine what you are and are not able to do to support them. If you’re getting further in debt, chances are you need to cut back on the non-essential supports you’re providing them.
-Cut your spending down to the point where it doesn’t exceed your income. If you spend more than you earn, you’re just going to keep getting deeper into debt.
Here is a simple way to live debt-free: SPEND LESS THAN YOU EARN. Take the money left over after paying necessary bills and invest. Later down the road you will thank yourself…I have..