Reader Advice: How to Live Debt-Free

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. The following was written by James Crocker, and is an excerpt from a much longer message. This post has been edited for clarity.

Congratulations! You're about to accomplish something many people have never done, and something that many others never will do: become debt-free. (Well, except for your mortgage.) It is no small feat, and I commend you not only for your efforts, but also for the helpful information you've spread to others.

I know where you are coming from. I struggled to get out from under student loans, car loans, and credit card debt for many years. It took a long period of living below our means to pay down all of our debts. Currently the only debt my wife and I have is a mortgage on our house. Our emergency fund covers six months of both of our salaries.

Beware of rationalization
If you're like me, when you get out of debt you will run into an interesting psychological problem: How now shall you live? You'll soon find yourself with “extra” income, income that was before going to pay off debt. What do you do with this extra cash? How will it impact your spending? How will it affect your impulse buys? How will it affect your budget?

With freedom from debt comes more opportunity to rationalize. I was overjoyed when I became debt-free: I felt free for the first time in a long time. I felt like I had an increased ability to spend. I very nearly stumbled into old habits of acting on impulse and making unwise purchases. It was because I didn't know what to do with my money. With no debt, you will begin to allow yourself to rationalize unwise purchases. “Well, I'm debt-free, and have the cash now, I could get that iPhone.” Or, even worse: “Now that I'm debt-free, I could get that big-screen HDTV with no interest payments until 2008″.

Set long-term goals
My advice is to first to set some more long-term goals, and to put yourself on a path to reach them. You've reached the “get out of debt” goal. But what now? How do you curb unwise purchases? For example, you might consider:

  • Do you want to retire early?
  • Do you want to put an addition on your house?
  • Do you want to pay for a child's education?
  • Do you want to travel?
  • Do you love antique furniture?
  • Do you want to get your pilot's license?
  • Want to start building that home theater?
  • Do you want to pay off your mortgage to become truly debt-free?

There's not enough money to do every whim you desire, but by thinking about it, planning for it, then saving for it, there will be enough money to really do what you want in life. Set long-term goals that you want to accomplish. Incorporate them into your planning, and into your month-to-month budget. As with everything else, it is very helpful to automate long-term savings — it keeps you from cheating yourself. (Two goals I recommend highly are establishing a six-month emergency fund and planning for early retirement.)

Give yourself an allowance
“Ok”, you say to yourself, “these long-term savings ideas are all well and good, but how will this help curb my desire to spend unwisely? How will this make me feel like I'm free of money problems?”.

Slow down! You're debt-free, but you will still worry about money, just in different ways, and for different reasons. You now have flexibility. It may seem like you're on Easy Street now, but after a month you'll realize you still can't buy everything your heart desires. We all know this in our heads, but in our hearts I think there's always a little voice saying, “Once I'm debt free, I'll be able to get X, Y, and Z.”

I recommend giving yourself an allowance. Budget it. This works great for me, and it will probably work for you. You're meeting your savings goals, you're paying all your bills, you'll be able to retire. And now when you have a desire or need (whether wise or unwise), you can debate using your allowance on it. Want a comic book? If you decide that's what you want, go for it. No guilt. This will also help curb large unwise decisions. Want that cool new Nintendo Wii? Do you have enough allowance for it? Maybe not, but if you save for a couple of months, you can afford it. This method effectively accounts your whims, and allows you the feeling of being more able to do as you wish. It is a great feeling.

As I said before, your money problems aren't over. You will never have an allowance big enough to get every little thing you want. You will generally always feel like those big purchases are just out of reach. But ultimately this allowance will help you and keep you out of trouble — it will prevent you from spending money you don't have.

Real-life example
As an example, here's what my wife and I have done now that we're debt-free. (I'm 27, we both work, no kids.):

  • We both contribute to our 401ks to get the company match. We're taking care of retirement.
  • We have a budget to cover monthly expenses and a little buffer for the unexpected. We're taking care of daily living costs.
  • We've set some long-term goals. I want to go back to grad school. We also want to purchase some nice furniture. It may be helpful to use multiple savings accounts to pursue multiple goals.
  • We give ourselves a monthly allowance. I use mine for video games. My wife has bought a few outfits she enjoys and doesn't have to feel guilty about. She feels even better when she shops around to find great deals that fit in her allowance.

We finally are debt-free, and are learning how to live and feel free as a result. It wasn't automatic — it requires continuing planning and awareness. But it is so worth it.

More about...Debt, Planning

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MissPinkKate
MissPinkKate

I just recently gave myself an allowance for clothes, and boy, is it freeing! Before I was always scared of overspending, so I bought a lot of crap I didn’t really like. Now I know EXACTLY how much I have available to spend (down to the penny!), so I can buy things that I really love and will treasure for the long term.

J.D.
J.D.

For a number of reasons, this e-mail really hit home for me. I carry on a lot of e-mail exchanges with GRS readers. They’re all productive, but some are more relevant to my life than others. This one had a lot of meat I could chew on. Also, I felt it did a great job of tying together a lot of stuff you all had been saying.

Finance and Fat
Finance and Fat

Awesome! It feels like my debt free day is so far off, but at the same time it is really inspiring to read what those on the ‘other side’ have to say about it. I can see myself there some day, I just have a large mountain to climb over first. 🙂

Best of luck to all of you making the journey.

Mariette
Mariette

What wonderfully sound advice! I fell into the trap the reader is describing. Years ago I had a little bit of debt and I paid it all off and felt like the world was my oyster. Then I got myself into even worse debt than I was in before! It really is all about transforming our relationship to money and our spending patterns.

RG
RG

You have a mortgage. A mortgage is debt. Calling yourself debt-free while you have a mortgage is either delusional or an abuse of the English language.

Dawn
Dawn

Isn’t the point of the post that he has eliminated the “bad” debt from his personal finances? Gosh give the guy some credit! Your right up to the point that he should have included making extra payments towards the mortgage on his list of long term goals. Something to consider James?

John the money
John the money

A mortgage is debt. Only once you have paid off for the house then you are properly debt free. That is like having the biggest boulder lifted from your shoulders.

J.D.
J.D.

Hm. Something has been lost in translation.

Obviously a mortgage is a debt. In the original conversation, we were clearly discussing non-mortgage debt. This is is a common distinction, and a useful one. Nobody is ever going to deny that a mortgage is a debt (how could they possibly do so?).

To clarify things, I’m going to edit the post to indicate that we’re discussing non-mortgage debt here.

Taylor @ ImprovLifestyle
Taylor @ ImprovLifestyle

What about this? Put every paycheck into a high interest savings account, and pay everything on credit. At the end of the month, you have earned money on your income, and then you pay off your entire credit card bill.

I do this each month (with a budget), pay everything with credit, and I make money in the process.

Yes, buying everything on credit can be dangerous because there isn’t a tangible thing being spent, but with a proper budget, things go smoothly for me!

cashgoat
cashgoat

I can’t even begin to explain how good the advice to have an allowance is. We’ve been doing that for a long time and it is extremely important to keeping our budget functional. We recently ran into some troubles with a job loss while trying to get out of debt so we cut the allowance. We were ready to crumble without it and decided to bring it back in a smaller form. It is so wild what an effect this has on our perception of our situation. The trick is not to let the allowance get too big because it… Read more »

IdeaSenator
IdeaSenator

Mortgage is the biggest debt anyone can have. That is what I am avoiding. I am happy living in rented situation that helps me live stress free of not having to fix the kitchen sink, taxes etc. If I don’t like where I live, then I move. The concept of home is pertinent in me, but when I think of the debt attached to it, I hyperventilate. It is not credit cards or small loans that bug me as they are easier to handle. It is a house mortgage that is the big problem for me. Knowing I will loose… Read more »

Traciatim
Traciatim

I don’t want to be the pin that bursts the bubble, but isn’t saying “I’m debt free; except the mortgage” kind of like saying “I’m drug free; except for pot”?

jojo
jojo

Not really, Traciatim, in terms of credit rating. Mortgages are considered a necessary houshold expense and don’t count against you as a debt. It is expected that a house is something most people don’t pay in full.

willie
willie

MOST people have mortgages believe it or not. Everyone needs a place to live but not a new Wii. Now a days, its hard enough to buy groceries. I am debt free with a mortgage but still feel I am in the minority. It would be great not to have a mortgage but I am also realistic. Do I want riches when I retire or memories? I have heard too many stories of people working their whole life, saving every penny for that Winnebago, retire and have health issues that prevent them from living their dream. Stay with in your… Read more »

Anon
Anon

Well I’m actually at this point in my life. And its interesting. Automation for everything in order to stay this way. 401k’s for my wife and I maxed. Same for IRA’s. And above that X amount a month into cash saving for building up the 6 month fund (which we use for sudden larger emergencies like blown water heaters). Deciding what those goals is kinda challenging. Yes we could work on our mortgage but we most likely won’t be living there in a year. We will have kids in a few years so savings are being increase for the medical… Read more »

J.C. Carvill
J.C. Carvill

The fact that so many people now have problems with their mortgages should open our eyes now that whatever we call it, a mortgage is a debt. I’m sure that James Crocker have also put the mortgage payments in the budget. So, why not having “pay off the mortgage” as a long term goal?

J.C. Carvill
Email: [email protected]
http://www.cosmosing.com/jeanclaudecarvill/index.php

Brent
Brent

For those readers who are interested in an artistic and historical reminder of why being debt free is a worthy endeavor, I recommend the movie “Sweet Land”.

If I remember correctly the literal translation of mortgage is “until death” in French.

Inspired by your posts, J.D. and the experiences and perspectives of your readers’ comments.

justin
justin

I don’t think that contributing to the 401(k) up to the match has retirement under control either, unless there’s some other pension or retirement account unmentioned.

James Crocker
James Crocker

Hey gang, author here. Thank you for the kind comments, and thank you J.D. for posting my email (and doing a fantastic job of editing my ramblings!). I just wanted to address the ‘mortgage being debt’ issue. To anyone that wants to argue from a semantics point of view, you are absolutely right. I have a debt on owning my home. However, looking at it from a fiscal point of view, I don’t consider this such a negative thing. This is for a few reasons. Firstly, it is (hopefully) an appreciating asset, this makes it slightly different than something bought… Read more »

James Crocker
James Crocker

Another poster brought up a good point (# 20 Justin) that contributing enough to get the company match isn’t enough for retirement. Generally you are correct I think in my original email to J.D. I had a more comprehensive portion in there about retirement. But in essence we both get a full 6% matches dollar for dollar from our employers (which i think is above average), and then we do fully fund both of our ira’s as well, and then on top of that we save additional investments in a non-sheltered brokerage account (juuuuust in case we ever need to… Read more »

SR
SR

James, I think your comment about mortgage paydowns vs investment is brilliant and intelligent. I’ve read the advice in Motley Fool, and have seen noone else mention it ever. However, this is my question: at what point do you draw the line? Yes, many people get a tax deduction for their mortgage interest. However, isn’t it better to contribute a larger amount to long-term savings goals, than to pay more money in mortgage interest? I’m not entirely convinced in this theory is foolproof (and I really respect what the Motley Fools guys write). I, too, am wary about taking on… Read more »

Minimum Wage
Minimum Wage

* Do you want to retire early? * Do you want to put an addition on your house? * Do you want to pay for a child’s education? * Do you want to travel? * Do you love antique furniture? * Do you want to get your pilot’s license? * Want to start building that home theater? * Do you want to pay off your mortgage to become truly debt-free? —————————————– 1. Yes, anything to get out of my awful job. 2. In my case, that’s a really silly question. (A: Um, no.) 3. I’m already paying to educate thousands… Read more »

Minimum Wage
Minimum Wage

Question for James Crocker:

Do you think it is feasible for someone with student loan debt, earning minimum wage, to live below their means if living with parents is not an option?

Peter
Peter

Minimum Wage:

That’s a silly question really. It doesn’t even deserve an answer.

willie
willie

James,

Great points plus you could add not paying down your mortgage and saving instead increases your liquidity greatly. This is very important now since it is such a buyers market. If you NEED to sell your house today, you are in trouble.

James Crocker
James Crocker

#27/Willie, I agree completely. #25/Minimum Wage, I think it’s -feasible-, but in NO way shape or form do I think it’s easy. As JD has often pointed out, your 3 options for increasing savings are: save more, earn more, or do nothing. Since it’s probably tougher to save more, my (not very helpful) advice would be to work on getting a job that pays more than minimum wage. Big box stores like Best buy and home depot tend to pay slightly above minimum wage (and compensate for overtime), but I’d also recommend looking into working for UPS or a local… Read more »

Justin
Justin

Having just signed an offer for a condo, I can say that mortgages are definitely a heavy weight for someone who was formerly “debt-free”. But, that said, I don’t see how you can say you’re debt free when you’re renting either. Having a legally-binding contract that states that you must pay $x per month or lose your shelter and face whatever other consequences arise from that… That’s not really debt-free to me. That’s just replacing a debt owed to the bank with a debt owed to whoever owns the apartment. Outflow is outflow as far as I’m concerned. But I… Read more »

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