In this day and age many people do not know what it is like to be debt-free. Many young adults start out their independence by attending university and taking out student loans to finance their education. In addition to this, many young adults take advantage of the credit cards offered to university students and may graduate with mounting debt in credit card fees. Once they graduate, they may move on to car loans and then mortgages, it becomes never ending. Payments will always exist in your life.
What exactly is debt?
Debt includes all liabilities that are associated with an obligation to pay , for example if you borrow 50 euros from a friend that you want to repay him in two weeks. Even if you take out a loan or overdraw your checking account, it is by definition a debt.
If debtors can pay their debts on time and if the financial burden is not too great, no negative consequences can usually be expected.
Temporary borrowing is helpful in some cases to finance certain purchases – provided it is well planned and does not overwhelm the person concerned. A typical example is building or buying a house . Very few people have enough money to bear the costs alone. Only a loan enables you to build your own home. The home builders have to go into debt first, but then they own a house in which they can live rent-free or which they can rent out.
Think About What You Could Do Without the Horror of Debt Payments
Consider the amount that you pay each month with your own debt, and what you could do with that money if you were not applying it to debt payments each month. If you have £5,000 in credit card debt, as well as student loan payment, and a car payment you may be paying between £300 and £700 in debt payments every month. If you had that much extra money to put toward your savings account, your wealth will amount to something worthwhile. Paying interest on your debt each month is just one of the habits of people losing out on money due to increasing interest the longer you pay it off.
Consider Your Freedom from Debt
Being debt-free also equates to freedom. You may be more likely to quit your job if you are not happy, without the worry about whether you will be able to keep your home as a safeguard. Debt is a big worry that is always there in the back of your mind, even if you try to ignore it. Paying your debt off means that you can make your money work for you, and that you can begin to build wealth.
Change the Way You Think About Debt
People often mistakenly look at credit as an easy way to get the things that they want in the ‘now’. They fail to look at the long-term consequences and costs that debt can bring into your life. Living debt-free allows people to live the kind of life that they want to live without stress. It means that they do not have to worry quite as much about payments or what would happen if they were to lose their job if something was to happen.
A life without payments is very different from one with payments every month. Debt-free living means the possibility of saving up for the things that you really want. It means making sacrifices and resisting impulse purchases and things that you really don’t need. It means reducing the amount of money you waste each month. It means planning for the bigger purchases and making sure that you are using your money for the things that matter most to you.
Put a Plan in Place
To become debt-free, you need to create a debt payment plan first for yourself. You should list your debts in accordance with their interest rates. Then you need to find the money to apply to your debt every month. It may mean cutting back on your expenses or taking on a second job as compromises have to be made. Then you apply all of the extra money to the first debt on your debt-list. Once you have paid it all off, you then move on to the next debt, applying the allocated money as well as the payment amount from the first debt. You continue to do this proactively until you have paid off all of your debts.
This is also called a “snowball plan,” because as the payments become bigger as each debt is paid off, you can pay off the remaining debts way more quickly. Depending on the amount of debt that you owe, you may need to work hard for a year or two to pay off what you owe. If you have a large amount of debt, it helps to break down the plan in manageable pieces so that you will have milestones that you can meet along the way.
Commitment to Staying Debt-Free
Once you have become completely debt-free, you will need to commit to not going into debt again with yourself. It means planning and saving money for bigger means. It also means sticking to a budget, but all of these things are worth more than being in debt. Do not let all of the work that it took to get being debt-free there go to waste by taking on any more debt. An emergency fund can help you stay out of debt, but your budget is your best tool to stay out of debt and only to be used on a ‘rainy day’.
Habits to Help Keep You out of Debt
The most important step to take when paying off your debt is to avoid it mounting up, which means no longer relying on credit cards and skipping new applications for credit. Your goal should be to buy only things you can afford to pay for in cash, or at least by the end of the month when your credit card bill is to be paid off.
More tips and advice on how to get a grip on your debt and financial problems
- Let your creditors know right away if you cannot pay. Describe your situation and make it clear that you want to pay and are looking for a solution. Every creditor prefers this openness rather than simply stopping your payments.
- If you have accumulated debts with different creditors, the first thing to do is pay the existential bills . This includes rent as well as costs for electricity and water. If you do not pay your rent, in the worst case scenario, there is a risk of eviction.
- If there is still money left after that, you can use other installment payments or the like.
- Paying off debts with a loan usually only brings short-term relief. The new loan usually incurs higher interest rates. First, discuss the possibility of rescheduling with a debt counsel
When young people get into debt
Not only adults are affected: Debt can be a serious problem for adolescents and young adults , especially if they have never really learned how to handle money properly .
While many older debtors end up in the debt trap through no fault of their own, young people are often responsible for their own situation because they buy consumer goods for which their financial means are actually insufficient.
For this reason, many authorities are calling for the issue of debt to be better addressed in schools so that appropriate awareness can be raised at an early stage.
What are the causes of consumer over-indebtedness?
When a consumer’s private debt piles up, many assume that those affected caused it themselves through an inefficient lifestyle. But in fact many of those affected get into over-indebtedness through no fault of their own.
The most common reasons for over-indebtedness are:
- Illness, addiction, accident
- Divorce, separation, death of the partner
- Inefficient housekeeping
- Long-term low income
- Individuals can also inherit debts . Because not only the assets are inherited, but also the payment obligations that a deceased leaves behind. An heir is liable for this with his entire private assets . If the deceased left debts, the bereaved can turn down the inheritance . This must be done within six weeks of becoming aware of the inheritance.
How do you transition to this mindset while paying off debt? How to be Debt-Free ? Here are some tips to follow:
Embrace budgeting in your life. Making a budget might have been the lowest on your priority list. However, it’s an essential step in making sure you don’t overspend; in fact, trying to live within your means without a budget is often too difficult for the average person. A budget gives you guidelines to spend within, and you can choose the strategy that works best for you. For instance, keeping track of every single purchase or setting up monthly automatic transfers to savings accounts to meet your goals, then spending only whatever is left.
Get curious about your credit score and keep checking. Your credit score reflects the personality of your spending. As you pay down debt, you may not always see an immediate boost to your credit rating. However, in the long run, the less credit you use compared with your credit limit, the better.
You can track your score for free using one of the many apps or websites provided by banks, personal finance websites and credit card issuers. When you see your score gradually increase, that might encourage you to avoid taking on more debt to fluctuate the score.
Also, Reward yourself. Changing your money habits that you may have repeated for a long time is worth celebrating. When you create new routines like tracking your credit score periodically, using credit cards more wisely, saving a little of each paycheck or sticking to your budget for a full month, give yourself a cheeky reward (that doesn’t cost a lot).