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How to Become and Stay Debt-Free for Good

Living a debt-free life is easier than you may think.

Chris Scott

Contributing Writer at Tally

September 9, 2021

Suppose your personal finances include personal loans, student loans, car loans or credit card debt. In that case, you may believe that becoming cash-positive and living a debt-free life is practically impossible. 

However, debt-free living isn’t impossible. There are ways to become and stay debt-free for good. But, before we dive into conquering debt, we’ll start with a few statistics about debt in America and why it’s problematic. Then, we’ll explore concepts you could apply to eliminate your debt payments. Lastly, we’ll offer action items you can get started on today to live a debt-free life. 

Debt in America 

Unfortunately, debt seems to be all too common in our society. U.S. consumer debt reached new records in 2020. The average amount of money a consumer in the U.S. owes is $92,727

This debt includes: 

  • Mortgages 

  • Auto loans 

  • Student loans

  • Personal loans

  • ​Credit cards

  • Lines of credit 

Now, when it comes to debt-free living, many exclude mortgages from the conversation. Your mortgage is an interesting type of debt because, in many ways, it’s actually an investment. You’re fueling this investment over a 15- or 30-year period, and you can sell this investment at any time. For the sake of the "debt-free" discussion, we’re not factoring mortgages into your financial situation. 

Fortunately, if you’re in this boat, there are ways to become debt-free.


Understanding your debt-free journey

If you want to become debt-free, you should understand a few concepts and principles before you get started.

What does it mean to be cash-positive? 

To be cash-positive, your assets need to be more than your liabilities. An asset is something you own, while a liability is something you owe. The single most important thing to implement when becoming debt-free is a positive cash flow. 

If you have a negative cash flow, your monthly payments exceed your monthly income. You may need to borrow money, whether that be from a friend, a family member or a lender. 

What does it mean to “live below your means?”

If you live below your means, you choose to avoid optional spending so that you don’t owe money. 

There are many ways to cut back on expenses and live below your means. Consider buying a fuel-efficient car instead of a luxury gas-guzzler. Purchase a coffee only once per week instead of once every day. 

Studies have shown that we want to "keep up with the Joneses." When our neighbor remodels their kitchen, we want to too. If our friend gets a new car, we want to upgrade ours — even if it means taking out a car payment we can't afford. 

If you wish to live a debt-free lifestyle,  try to focus on yourself, your financial goals and living within your means, not anyone else's.  

How can patience and diligence help in your debt-free journey?  

Debt repayment can take a long time, especially if you have hefty student loans or high-interest debts from your credit card balances. Short of you winning the lottery, you’re not going to pay off all of your debt immediately. You need to be diligent and patient in your quest to live debt-free. 

There will be ups and downs, but if you stay the course, implement some of the action items from the list below and avoid new debts, you have a strong chance of becoming debt-free — and staying that way. 

Tips for becoming debt-free 

Let's take a closer look at some of the things you can do to become debt-free. 

Setting a budget 

Budgeting allows you to get a better handle on the money coming in and out. Start by looking at a pay stub or a statement from your bank account. This should help you determine how much money you have to spend each month. 

Then, review your credit card statement or bank account to determine your expenses. Some expenses are easier to track than others. For instance, you may know that your car payment is $400 per month and that rent is $1,600 per month. You can roughly estimate things like gas and groceries. Make sure that you include, at the very least, the minimum payments required to all loans and credit card companies. 

You’ll want to start with the essential expenses. Subtract these from your income. The amount you have left is earmarked for discretionary spending. Discretionary spending is the money you use for non-essentials, like eating out and entertainment. 

To become debt-free, you can apply your discretionary spending toward debt payments. This may mean that you focus on paying off debt instead of spending money on entertainment and non-essentials. 

Refinancing interest rates 

​Securing a lower interest rate can help reduce the total amount of money paid in the long run. Lower interest can aid with debt payoff because your debt payments will go further. 

For instance, let's say you’re currently paying $500 per month toward a personal loan. However, your lender is charging you $250 per month in interest alone. What if your lender cuts the interest rate in half? Your $500 is now going much further toward paying off your loan than it was previously. 

Both debt consolidation loans and balance transfer cards are excellent options to refinance your rates. You can also contact your lender to negotiate a lower rate

Paying off debts

If you want to get out of debt, you're going to need to pay off any outstanding debts. If you're unsure where to start, consider researching both the debt avalanche and debt snowball methods. 

You could also consider using tools to help. For example, Tally is a credit card payoff app that automatically pays your credit cards efficiently, using the debt avalanche method.

Building an emergency fund

Once you’re debt-free, put measures in place to help you stay there. 

Start by building an emergency fund. An emergency fund is a cash reserve that you use only in case of emergencies. Consider putting this money in a high-interest savings account so that you earn a bit of interest on it. 

As a general rule of thumb, this account should have six months’ worth of expenses in it. That way, if you lose your job or suffer an accident, you have money on hand to pay for your necessary expenses. Having this cash on hand can prevent you from taking on new debt. 

Start down the road toward financial freedom 

Debt in America is common, but that doesn’t mean it needs to be a part of your life. With a bit of hard work, you can become and stay debt-free. Understanding concepts like cash-positive and living below your means are excellent places to start. 

From there, you can implement action items to get your finances in order. 

If credit card debt is a stumbling block on your journey towards debt-free living, check out Tally†. Tally offers a lower-interest line of credit and a smart credit card payoff app to help you pay down debt quickly and efficiently. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.