Contributing Writer at Tally
September 3, 2021
In today's world, living debt-free may seem like an unachievable pipe dream. Managing personal finances and reaching long-term financial goals may seem especially challenging with burdens like credit card debt, student loans, mortgages and auto loans.
However, there is some silver lining. For one, you're not alone. As of Q4 2020, the collective consumer debt in the United States totaled $14.56 trillion. Second, it is possible to become debt-free.
This article will touch on why and how you can become debt-free. We then dive into the four unexpected benefits of living debt-free. Hopefully, you will be inspired to jumpstart your debt payoff and work toward financial freedom by the end of this article.
Living a debt-free life is more achievable than you may think. Before we explore why that's the case, it's important first to define what exactly "debt-free" means.
Some believe that the definition applies to all expenses. Hypothetically, it means that you make all of your monthly payments in cash or with a debit card.
Another school of thought believes that the definition of "debt-free" should not account for your mortgage. You could make the case that your mortgage is technically an investment in an asset. It should grow in value over time, and you can sell it down the road. Plus, paying off a 15- or 30-year mortgage will not happen overnight.
For the sake of discussion, we are going to go with the second definition. When we say debt-free, we are specifically referring to debts associated with outstanding credit card balances, personal loans, medical bills, student loans and car payments — what some may define as bad debt. Debt repayment is much more possible in the short term with these lending options than it is with your mortgage.
Additionally, living debt-free is achievable. It's important that you take time to learn more about how to get out of debt, but it comes down to a few things:
Researching debt payoff strategies like “debt avalanche” and “debt snowball”
Creating a debt repayment plan
Budgeting so that your monthly expenses are equal to or less than your monthly income
Avoid taking on new debt
Controlling your spending and living within your means
Putting money for an emergency fund into a savings account
If you adhere to these principles, there's a strong chance that you will lower your debt and, as a result, reduce your financial stress.
Another tool to help is Tally, a credit card payoff app that automatically pays down your balances in the most efficient way possible using the debt avalanche method. Using a tool like Tally is an excellent way to start paying down your high-interest debt from your credit cards.
Some people like to make the case that living with debt payments is a good thing and sometimes necessary. For example, you may need to take out a car loan to have a vehicle that gets you to work every day. Taking on student loan debt can help you obtain an education. And, if you are responsible with your money, you can be a borrower who uses debt to build their credit score or secure various credit card rewards.
While the choice to take on debt will vary from person to person, many benefits come when you start paying it down. We think you're far better off working to pay down debt and closing accounts with your lenders. Below are the four unexpected benefits of living debt-free.
Some loans, like car payments, have fixed interest payments. You know exactly how much you need to pay back each month. You can pay more, but the amount at the end of the loan is fixed. You owe a predetermined amount of money.
There are other forms of lending that have fluctuating interest payments. Credit cards are an excellent example. Credit cards have compounding interest, meaning that your lender charges you interest on top of previous interest charges. Over the years, the money that you spend on interest could add up to thousands of dollars.
Paying off your debts will save you money in the long run, as it reduces the impact of compound interest.
There's no denying that debt is stressful. Living paycheck to paycheck and continually managing your finances can cause anxiety. As Debt.org states, "A shortage of money led to a massive increase in anxiety. The emotional strain of dealing with debt can be almost as damaging as getting your electricity cut off or having your car repossessed or seeing your credit score plunge to where you'll never get another loan."
Being debt-free provides a lot of peace of mind. You don't have to worry about your credit report or bank account. Nor do you have to worry about calls from debt collectors. The financial freedom that comes with being debt-free can do wonders for your psyche.
Once you're out of debt, you can start saving money and working toward your financial goals. Perhaps you'd like to retire early. Maybe you'd like to take a special 20th wedding anniversary trip with your spouse. Whatever your goals are, being debt-free makes it easier to work towards goals.
Perhaps more importantly, being debt-free allows you to build a rainy day or emergency fund. As a general rule of thumb, these funds should cover at least six months of living expenses.
Having one of these funds provides a level of comfort, knowing that even if you were to lose your job or a medical emergency were to arise, you would have the cash on hand to cover your expenses.
Numerous factors influence your credit score, including your credit utilization rate, your total open credit accounts and your amount of available credit. As you begin to pay off debt, all of these factors are bound to improve. This, in turn, boosts your credit score.
A higher credit score means you can receive larger credit limits and better interest rates. Becoming debt-free and building your credit score could be particularly beneficial down the road when you need to rely on credit, such as when you're purchasing a home.
If you currently have debt, you may feel it's impossible to get out from under it. Perhaps your balances feel insurmountable or you have high interest rates, making it more difficult to find the extra money needed to pay down your principal. However, you don't need to necessarily feel this way. Living debt-free is possible.
With a bit of financial management and handling your money properly, you can pull yourself out of debt. Doing so has its perks. Living a debt-free lifestyle can save you money and allow you to also start saving toward your financial goals. It also can help lower your credit score as well as your stress levels.
Living debt-free starts with paying down debt. That’s where Tally can help.
Tally is a smart credit card debt repayment app that combines all your credit cards into one monthly payment, ensuring that you don’t miss any due dates or minimum payments. Tally also offers a lower-interest line of credit1 you can use to pay off your higher-interest credit cards. With the assistance of an app like Tally, you can start working toward debt freedom.
1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate.