In today’s expensive and debt-heavy world, you may hear the term “debt free” and immediately think to yourself: that’s not possible. Becoming debt free takes some work, but it’s definitely possible. And you don’t have to cut up all your credit cards to reach this level of financial freedom either.
At O’Bryan Law Offices, we have extensive experience in helping our clients live a life of freedom from debt through the Chapter 7 bankruptcy or Chapter 13 bankruptcy codes, as well as helping our client credit rates recover. To schedule a free consultation, call a Louisville bankruptcy attorney with our firm at 502-400-4020.
What Does Debt Free Mean?
Living a debt free life means you don’t owe money to anyone. This means no student loans, no car loans, no medical bills, no credit card debt, and no mortgage. You can pay off every penny with several debt payoff methods, but your path to financial freedom begins with setting a budget. Additionally, it’s important to understand certain finance terms, such as “being in the red.” These terms can help you when speaking with a financial advisor about your debts.
How to Become Debt Free
Set a Budget
Setting a budget for yourself is crucial for achieving a debt free lifestyle. This budget will help you determine the extra money you have to put toward your debts and will help you determine where you can trim your expenses.
Determining Monthly Output
The first step in creating a budget is determining your monthly output and input, and then determining if you have a cash surplus or deficit.
Go through all of your monthly bills, including any debt payments, and add everything up. If you have bills that aren’t monthly, divide those bill amounts by the number of months in the billing cycle — 12 months — to determine monthly expenses. If you have bills that fluctuate by the month, determine an average by looking at bills from the last 6 months to a year.
Add everything up, and that’s your total monthly output.
Determining Monthly Income
If you’re a salary employee, this step is simple. Just multiply your check amount by the number of checks you get each month.
If you’re an hourly employee or a freelancer, this step takes a bit more work. Look back at your checks over the last 6 months to a year to determine an average income and use that number.
Surplus or Deficit?
The final step in budgeting is determining if you have a cash surplus or deficit. Do this by subtracting your total monthly output from your monthly income. If your calculator gives you a positive number, that’s a surplus. You can use that money to pay off your debt.
If your calculator shows you a negative number, that’s a deficit from overspending. To fix this, you can trim some of your unnecessary expenses, take up a side hustle, or get a part-time job.
How to Live Debt Free?
The only way to a debt free lifestyle is paying off debt. That’s easier said than done, and can take time. There are countless debt repayment methods, but we’ll be telling you about two methods.
This repayment method is a common recommendation from finance experts because it prioritizes interest rates and balances to help you save on interest charges.
Rank your debts from the highest interest rate to the lowest. If two debts have the same rate, the highest balance should be the priority. Put your cash surplus towards the debt with the highest balance and pay the bare minimum on your other debts. Repeat this until you’re debt free.
This repayment method is another popular one among finance experts. It’s similar to the Debt Avalanche method, except you focus on the lowest balance.
Rank your debts from the lowest balance to the highest balance. Put all your cash surplus towards the debt at the top of your list while paying the bare minimum on your other debts. Once you pay off the smallest debt, move to the next smallest debt balance. Repeat this until you’re debt free.
What is it Like to Be Debt Free?
Once you achieve the long-awaited debt free lifestyle, your new focus must become staying debt free, so you can continue doing what you want to do instead of doing what you have to do for the sake of surviving this expensive world. You do this by building up your savings, using credit cards responsibly, living beneath your means, preparing for retirement, and budgeting for vacations and other large purchases.
Building Your Savings
A large part of financial freedom is making sure you’re taken care of when an emergency happens. This could mean anything from your car breaking down on the side of the road and needing major repairs, to having a health emergency and paying for your ambulance ride.
Take care of your future self or family now by setting aside emergency money in a savings account. Do this by putting your surplus money into a savings account until there are 3-6 months of living expenses in it. This way, you’re prepared for any financial disaster and you won’t have to resort to credit cards.
Use Credit Cards Responsibly
Speaking of credit cards, you can still use them to your advantage in a debt free lifestyle. You can do this by reaping in those reward points, which can become profitable over time.
The key to using your credit cards responsibly to get those reward points is to pay off the entire balance every month. Doing this will make sure you pay off your cards within the grace period so the credit card company won’t charge you interest. You’ll of course still get all your reward points.
Responsible credit card use pays off in another way too: by keeping your credit score sky high. If you ever end up in an emergency situation, your above-average credit score will ensure you can get a loan if that’s the only option available.
Living Beneath Your Means
Remaining debt free starts with small purchases. Do you need to buy a $3 coffee every day of the work week instead of making coffee at home? Is it worth it to spend 10 of your hard-earned dollars every weekday for lunch when you can pack a lunch for work instead? That daily $3 cup of coffee is $15 every 5 days, and roughly $450 every 30 days. Annually, a daily cup of coffee is $162,000 that you could be putting towards your debt free life. The same goes for spending $10 for lunch every weekday instead of packing yourself a lunch for work.
Living beneath your means extends to the big purchases too. Buying the big, fancy house or car that’s outside of your budget just because it looks nice isn’t real wealth. Real wealth is living a life of financial freedom so you can buy those luxurious items later. So for now, buy the used car and a smaller house.
Preparing for Retirement
You may be decades away from retirement, or maybe you’re simply too preoccupied with paying off your debt that preparing for retirement is the last thing on your mind. But it’s a crucial step in taking care of your future self and family while also maintaining financial freedom.
Saving at least 15% of your income via investments or a retirement plan will give the average person enough to enjoy their retired life. This will prevent you from reaching for your credit card and restarting the cycle of debt when the time comes.
As you get promotions and raises throughout your life in the workforce, treat yourself by putting 50% of the pay increase towards your “wants” in life, and the other 50% towards your retirement savings.
Budgeting for Large Purchases
Once you reach your debt free life, you’ll still naturally have occasional big purchases like houses, cars, vacations, etc. You can still pay for these things while remaining debt free if you plan carefully.
Put this big purchase into your monthly budget and plan for it. A good way to do this is by redirecting some of your typical monthly savings. For example, if you’re saving 20% of your income monthly for retirement, redirect 5% of that towards your big purchase for however long you need, until you have the money you need.
If the big purchase in question is a house or a car, this may become a long-term plan in your budget. Because of that, you may need to trim unnecessary monthly spending to meet your goals.
Contact us Today to Start your Debt Free Life
When you contact O’Bryan Law Offices, we’ll start off with scheduling a “Fresh Start Planning Session” to meet you in person, discuss your situation, and talk about your options. Our Kentucky debt counseling attorneys are highly skilled. Please call 502-400-4020 or fill out our online contact form to speak with any of our associates.
You deserve to live a life of freedom without bankruptcy, and O’Bryan Law Offices will help you get there.