A debt free life is a very ideal life financially but it seems to be a very steep uphill climb to achieve such a feat. Many people, even financial professionals and experts, suggest that in order to have financial security, you should eliminate debt. However, in the modern world, being debt free doesn’t necessarily mean being financially secure. Our savings might fall short at times and we will need another source of funds as the need arises. The old times suggest that savers are winners but the modern times suggest that people who can manage their debt well are the winners.
Before anything else, let us categorize debt. Debt is divided into two categories, a good debt and a bad debt. Good debt is defined as a debt that could bring money to your pocket, more money than the debt itself while bad debt is defined as a debt that takes away money and doesn’t bring anything good in return. However, whether it’s good or bad, debt will always be debt, a money borrowed that should be paid with interest. Ideally, if you can avoid debt, avoid it, but if it’s unavoidable, manage your debt very well and make it work to your advantage. Here are some ways to avoid a debt free life:
1.) Spend only on needs. We may not notice it but normally we spend more on our wants than our needs. Wants are things that we can live even without it while needs are necessities, things that we can’t live without or things that will bring good to us. Create a budget, study it, and stick to it. If you eliminate spending on your wants, you’ll get to save a lot of cash which could be used in emergency cases.
2.) Develop the habit of saving. Saving provides you financial cushion and peace of mind. It makes you think that you have something to pull out in case the need arises. Saving and spending goes hand in hand. If you spend a lot, you save less, and if you spend less, you save a lot. Savers are still winners these days however, times have evolved which makes savings not enough.
3.) Increase cash flow. Do you have some spare time to spend during the day? Your free time is the best time to create and add more wealth. If you have a job, find something productive to do after work to bring in more cash flow. Successful people financially doesn’t rely solely on one source of income, they normally have many. People who stick to just one income are people who are always struggling to make ends meet and worse, when the sudden need arises and they’re out of resources, they resort to debt that will bring them down. Worse, they resort to debt to pay their existing debt, tragic.
4.) Create an emergency fund. An emergency fund, as the name suggests, is intended for emergency. Emergency fund should not be used for vacation to to buy a new gadget (remember, focus on your needs). The suggested amount for an emergency fund is at least 3 times more than your annual income or an amount that could support you in 3 years based on your current income.
5.) Go for good debt and manage it well. However, no matter how we strive to become debt free, there will always be times that we’ll resort to debt to achieve something good (maybe better). That is where good debt comes in. Good debt, as defined earlier, is a debt that will produce more income for you. Good debt are debts normally taken to put up an investment, something that would yield a return higher than the debt itself including its interest. Good debt, if handled properly, could lead to serious gains and wealth.
Just like anything in life, management is the key in finances. Well planned and managed finances would give some really good returns and more importantly, peace of mind. A debt free life is a worry free life and if unavoidable, a well managed debt and a well executed plan would lead to great rewards. Manage your finances well before it manages you. Get rid of debt if possible.