Think how wonderful it could be if when you got paid you could keep most of your money for yourself. After paying for your basic living expenses: mortgage/rent, food, utilities, and transportation you still have money left over. The rest of the money could be used for daycare, savings, and any other personal expenses you may have. You would feel rich knowing that you had all your basic needs covered with money left over to do the things needed and then some. Does this sound wonderful or impossible? Would you feel rich or just financially secure? I can tell you that being debt-free is the new rich.
“If your goal is to become financially secure, you’ll likely attain it…. But if your motive is to make money to spend money on the good life,… you’re never gonna make it.”
Thomas J. Stanley, PH.D., William D. Danko, Ph.D., authors of The Millionaire Next Door.
If this sounds too good to be true, I am here to share a little of my story about the road I took to becoming debt-free. For too many years credit card debt was eating away at my paycheck. It limited the amount I could save and invest. I spent my early twenties buying whatever I wanted and racking up debt. I am not the only one that lived like this. However, I had a hard talk with myself when decided I no longer wished to be in debt. I stopped spending and began paying down my debt as quickly as I could. It took a few years, but we got it done.
For Americans, Debt Free is the New Rich
With so many Americans in debt, being debt-free is the new rich. There is a tremendous amount of money paid to credit card and loan institutions monthly. However, if Americans began paying off these bills, they could at least feel richer.
According to Shift Credit Card Processing, 80% of Americans have consumer debt. Americans have $14 Trillion in debt, collectively. The average consumer debt is $38,000 excluding mortgages. The average American household mortgage is $189,586.
13% of Americans expect to be in debt for the rest of their lives. Only 1 in 3 Americans have a written budget. Almost half of the families in the US live paycheck to paycheck.
America has an addiction to debt. A vicious cycle that can only be broken with a change in mindset, budgeting, and/or additional income. Therefore, like me and others, you must decide to spend less and put all your extra money towards your debt. If I can do it, you too can be part of the debt-free is the new rich club.
Is Being Debt Free the New Rich
It means that your discretionary income has just increased. Discretionary income is the money left over after you have satisfied all your financial obligations. Hence, you can now do more with your net paycheck. The first thing to do is to increase the savings to build a 3 to 6 months emergency fund. This will eliminate the need to rely on credit for the unexpected.
Once this is done, begin increasing the number of funds you can contribute to your 401k or other investment properties. Hence, debt-free does not equal wealth. Wealth is based on financial assets. You will need to build wealth by saving and investing. If you own a house and it is paid off, then the value of your home is an asset and can contribute to your net worth. Hence, your net worth equals your assets minus your liabilities. Therefore, if you do not have debt, you can then work towards building wealth. That is one reason why debt free is the new rich.
Living the minimum payment dream
Like myself, many consumers felt that if you can afford the minimum payment then you were okay. However, by paying only the minimum payment, you will extend the number of years you remain in debt. For example, the average consumer has about $6,000 in credit card debt with an interest rate of 20.66% as of May 9, 2022.
Credit Card Balance $6,000
Credit Card Rate 20.66%
Minimum Payment $240.00
Balance payoff 39 months
Total payment: $7,960
With an additional $50 per month
Minimum Payment $290.00
Balance Payoff 24 months
Total payment $7,510
With an extra $50 you shave off 1 year and 3 months and save $450.00
Use this calculator from Nerdwallet.com to calculate your Credit Card Payoff time and total payment.
Debt-free now what
Now would be the time to put all the extra money saved from being debt-free towards becoming rich. At this point, you should focus on achieving the 80/20 rule where you pay yourself first. This is where you put 20% of your income towards saving and investing with automatic deposits into your savings and investment accounts. First, begin working on your 3-6 months emergency fund. Secondly, begin investing in your job’s 401k plan or consult a financial adviser for Individual Retirement Accounts (IRA) and other investment properties. Explore some of these various options by reading How To Build Wealth From Nothing By Investing? There are some great tools to start you on the road to investing. Hence, this will show you how Debt Free is the New Rich.
How to be debt-free
Let’s take a small step back for a minute to explore how to become debt-free. The first thing to do is review all your debt. Write them all down and begin to form a plan to be debt-free in 2 to 3 years. It can be done. My son recently returned home to eliminate his debt. He was able to wipe out $20, 000 in credit card and student loan debt. However, if he had not moved back home, it would have taken him a little longer. There are two methods for paying off debt quickly. The Snowball and the Avalanche method.
The Snowball method requires you to:
Step 1:List your debts from smallest to largest regardless of interest rate.
Step 2:Make minimum payments on all your debts except the smallest.
Step 3:Pay as much as possible on your smallest debt.
Step 4:Repeat until each debt is paid in full.
The Avalanche works this way:
Step 1:List your debts from highest to lowest interest rate.
Step 2:Make minimum payments on all your debts except the one with the highest interest.
Step 3:Pay as much as possible on your highest interest debt until it is paid off.
Step 4:Repeat until each debt is paid in full.
How to live debt-free
Living debt-free is the new rich but you may not feel rich. You must commit to Living Below your means. Therefore, you may have to say no to things that are outside of your budget. Also, you must plan for future events, set aside money for parties, and vacation and most of all save first. Debt-free is the new rich because you will have money to save in advance for many of the things you want. Thereby, always being prepared.
How to stay part of the debt-free is the new rich community
You have to decide that you no longer wish to pay for the item and also pay the credit card companies. Even if it is on sale, you will still pay more in interest and penalties if you are struggling and living paycheck to paycheck. To avoid this, save for the things that you want. Create a budget and stick to it. Learn the value of living below your means so that you can begin to build wealth. Having an emergency fund and sinking funds for the things you want will keep you out of financial trouble. Credit cards are not an emergency fund but an emergency trap. Hence, debt-free is the new rich. The ability to pay for all your expenses makes you financially free.
The downside to being debt-free
Yes, there is a downside to being debt-free. Credit bureaus require a certain credit mix to maintain good credit. When you begin to pay off debt your credit score could take a hit, especially when paying off personal loans and car notes. However, you can be prepared by maintaining a credit score between good and excellent. Read What Hurts Your Credit Score the Most? For some insights as to how best to navigate this. Regardless of this negative impact debt-free is still the new rich.
Also, if you pay off your mortgage early you will not be able to write off the interest on your taxes each year. However, 87% of taxpayers take the standard deduction so this may have less of an impact on most. Nevertheless, it will still affect your credit mix. Especially if it is coupled with paying off car loans and personal loans. Therefore, make every effort to keep your credit in good standing as you may need to purchase another house or car in the future.
Debt-free but not rich yet
You may feel richer because you suddenly have more money from paying off debt, but you are not rich yet. The hard part will be staying out of debt. However, do not let this newfound wealth burn a hole in your pocket. This is the time to stay the course and truly build wealth for your future. Save and invest because this is the fastest way to become part of the debt-free is the new rich world.
Debt-free leads to millionaire status
Once you start to save your money, I hope that you become addicted to saving. When you save your first $1,000 and move on to your first $5,000 then you are well on your way to millionaire status. Therefore, continue striving higher by learning How To Save $10,000 in A Year. This blog will provide the road map for becoming a millionaire. Did you know that eight out of 10 millionaires invested in their company’s 401k plan? This could be you. You have more money to invest because you are debt-free. Thereby, becoming part of the debt-free is the new rich community.
At what age should you be debt-free?
The average person should be debt-free by age of 58. However, with discipline, hard work, and, some help you could be debt-free before age 39. My youngest son is completely debt-free at 30 years old. However, he had to move back home to pay off his credit card debt, and student loan, and sell his car. He now lives in a city with public transportation, so a car is no longer a necessity.
Most people should shoot to be debt-free before they retire. This includes credit cards, car loans, and mortgages. For us, all credit card debt and car loans are done. We are just working on paying off the mortgage within seven years. Hence, we are striving to be completely part of the debt-free is the new rich community.
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Let nodebtremain outstanding, except the continuingdebtto love one another, for whoever loves others has fulfilled the law
Romans 13:8 (NIV)
Recap for Debt Free is the New Rich…
- Increases discretionary income
- Allows you to be financially independent
- You will be able to save
- It allows you to invest
- You can build wealth
- It can help you become a millionaire
- It makes retirement easier
Here are additional resources:
Living Stingy
Financial Literacy For Beginners
What is the Purpose of a Budget
Let’s Budget, Spend, and Live!
Sabrina
