Should You Go Debt-Free? Pros and Cons of Debt-Free Living

Is being debt-free a good goal to have? Many experts say yes — that being financially secure delivers more happiness than spending. However, most of us were not born wealthy, and debt is often a necessary part of life. Debt-free living does not mean never borrowing — it means managing your borrowing and developing good spending habits.

What Is Debt-Free Living?

For most people, living debt-free means spending less than they earn and adding to their savings every month. They understand that borrowing might be necessary for “needs” but never “wants.” Their self-esteem doesn’t depend on other people admiring their possessions or their Instagram-worthy trips. People who live debt-free are cautious about taking on good debt and fanatical about avoiding bad debt.

What Is Good Debt vs. Bad Debt?

To live debt-free, you must understand the difference between good debt and bad debt. What is good debt? Good debt is borrowing when it’s necessary to get something that you need. For example, buying a home often makes more sense than renting, and most first-time buyers need a mortgage to make that happen. 

On the other hand, throwing down a credit card to finance a vacation that you can’t afford or a pair of shoes you don’t need is bad debt. Financing “wants” because you can’t afford to pay in cash is bad debt and to be avoided.

Does Debt-Free Living Lead to Happiness?

Charles Dickens famously offered this advice in his novel David Copperfield: “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”  In other words, spending more than you earn harms your well-being.

And Albert Einstein wrote: "A calm and modest life brings more happiness than the pursuit of success combined with constant restlessness." In other words, showing off and splashing out does not bring joy.

Many studies have associated debt with increased stress levels, health problems, depression, suicidal thoughts, relationship troubles, and sleep disorders. While paying off debt and learning good financial management has been shown to increase happiness.

Principles of Debt-Free Living

People who live without debt understand and live by these principles, and so can you.

1. Retail therapy isn’t therapy

Retail “therapy” does not increase your happiness. Responding to stress by buying things you don’t need and can’t afford might deliver a hit of self-esteem and distract you temporarily. But then the bills come in, stressing you out and sending you to Amazon or the mall for another hit. If this is how you cope, you need professional help – mental health counseling, credit counseling, and perhaps a group like Debtor’s Anonymous or Shopaholic’s Anonymous. 

2. “Budget” doesn’t mean “buzz kill”

You might think that setting up a budget will doom you to a fun-free life. Nothing could be further from the truth. In fact, establishing a budget helps you define what’s most important to you and where you can save. If you’re a foodie and eating out is crucial to your well-being, you might want to drive a cheaper car or rent a smaller place to increase your restaurant budget or cover cooking classes.

A good budget can eventually find you more money to spend where it gives you joy because you’ll spend less on things that matter less. Make sure that your budget includes savings for emergencies and retirement as well as goals like a wedding, trip, or boat – whatever lights you up.

3. Forget the Joneses

Comparing your life and your things to those of others is a sure path to unhappiness. There will always be someone with more toys than you. If your friends are the sort who think more highly of you if your car is costly or your neighborhood exclusive, find better friends. Socialize mainly with those who spend about the same amount that you should be spending. As you learn to manage your finances, your happiness will tend to increase — and people are attracted to those who are happy and confident. Excess spending isn’t necessary to be liked or admired.

4. Choose cheaper options

Depending on your location, a car may be necessary. But a brand-new luxury ride isn’t. Name brand items are often identical to (and made in the same factory) as off-brand or generic alternatives. Every time you make a wiser choice, pat yourself on the back. And don’t forget to shop for your expensive necessities like car insurance every year to minimize what you pay. Use tools like GoodRx to save on prescription drugs and Gas Buddy to pay less at the pump. 

5. Pay (attention)

Budgets are great but they only work if you respect your limits. Every month, take a look at what you spent the previous month vs what you planned to spend. Adjust if necessary. If your utilities went over budget, for instance, you could lower the thermostat a little, pack your lunch a couple more times a week, or stop Netflix for a month (you can always binge your favorites the next month). And don’t forget to celebrate your wins. Did your credit card balances go down? Were you able to pay more than the minimum? Did you save a little extra? Enjoy your victories.

6. Cash is king

One way to avoid impulse purchases is to leave your credit cards at home. And never save your credit card information on any shopping site. Sit on any purchase decision for at least 24 hours. You’ll find the urge to spend dissipates with a little time. 

Decide at the beginning of the month how much you can spend on discretionary items (your “wants” like meals out, movies, new clothes, or whatever makes you happy). Put cash for those things in your wallet each week, or load that amount onto a debit card or spending app, or transfer it to a dedicated free checking account. Use only that for your “fun” money and don’t exceed your budget.

7. Set up an emergency fund

When you build an emergency fund, you create a safety net for you and your loved ones. It might feel like a tall order – especially when you have to juggle living expenses, paying down your debt, and other important financial goals. 

Like the saying goes: How do you eat an elephant? One bite at a time. Start small, and go from there. Set a goal of $500 or $1,000. See if you can stash away a little each week or month toward unexpected expenses, such as urgent dental work or emergency car repair. 

Once you’ve got that initial amount tucked away, go for the next milestone. Eventually, you'll have enough for three to six months of basic living expenses. This larger cash cushion can help you stay afloat during more serious disruptions. For instance, a devastating job loss or facing a monster medical bill.

To make this happen, set up automatic transfers to your savings account. That way, you won't skip a beat. Plus, you won't don’t have to think about it. Even small amounts add up over time.

• Start with $500. 

• Aim for an end goal of three to six months of expenses.

• Set up automatic transfers to your savings.

This isn't an overnight process. Expect it to take a bit of time. Remember: The peace of mind you’ll gain is totally worth it. Knowing you have a backup plan can make life’s surprises a lot less stressful.

Changing your habits

Living within your means and changing your spending habits is key to get rid of debt stress for good. 

Practice mindful spending. To turn things around, begin by practicing mindful spending. Shop when you're in a good mood, and avoid stepping foot inside a store when you're hungry. Studies show that you're prone to spend more money when you're running on an empty stomach. Keep that willpower strong! Only buy things you value or need. 

Avoid spaving. Your favorite retailers are masters at employing clever marketing tactics. These strategies make it easy to part with your hard-earned cash. Those supposed "money-saving" deals that are designed to get you to spend more to save – BOGO, limited-time offers, free shipping with a minimum purchase, will put a bigger dent in your pocketbook. Steer clear of these deals. 

Make it easy to do the right thing, and hard to do the wrong thing. For example, delete saved credit card info on your computer or PayPal accounts. Use cash in stores. Avoid shopping online when you're bored. 

Put money saved back toward your savings goals. Any money saved should go directly toward your money goal, such as into savings or to pay down your debt. 

Budget. Last, make a habit of budgeting regularly. At the start of each month, plan out where your money will go. Consider a guilt-free budget or zero-based budgeting. This can help you stay on track and shows you where you can cut back.

Keep track of your expenses using an app or a pen and notebook. You’ll start to see patterns and pinpoint where you can make adjustments.

• Practice mindful spending.

• Budget regularly at the start of each month.

Track your expenses to find patterns and cutbacks.

Five Ways to Become Debt-Free

While budgeting tips are great for living a debt-free life, many of us are already saddled with balances. How can we pay off bills faster?

There are proven tools for paying off debt. Before you start your debt reduction plan, however, make sure that you have money put aside for emergencies. Everyone needs an emergency fund. Personal finance specialists recommend putting enough to cover two-to-six months of expenses, depending on your income stability. Before starting debt reduction, save at least a few hundred dollars to cover an auto repair or urgent care visit.

Snowball or waterfall

Two methods that can be effective for credit card repayment are the snowball and waterfall plans. The snowball method looks like this: Make the minimum payments on all credit cards except the one with the smallest balance. Every month, make the biggest payment you can to get rid of that balance as quickly as possible. Once that balance is gone, add what you were paying toward the first card to the minimum payment for the account with the next-smallest balance, and so on. 

The waterfall works in a similar way except that you target the account with the highest interest rate, then the next-highest, and so on. The waterfall will save you the most money but many prefer the snowball because they get a win early on and that encourages them.

Debt consolidation

Debt consolidation simply means using one account to pay off many accounts. You can do this with a home equity loan, personal loan, debt management plan, or balance transfer card. Ideally, a debt consolidation scheme lowers your interest rate, your payment, or both. 

Understand that borrowing to consolidate debt does not make you debt-free. You still owe the money. Debt consolidation can help you pay debt faster by lowering your interest rate, allowing more of your payment to go toward reducing your balances. Many debt consolidation efforts fail because consumers tend to run up their balances again after consolidating. That can leave you in a much worse financial position, so approach this option with caution.

Credit counseling

Note that no method will work unless you stop spending more than you earn. One way to make that happen is to contact a non-profit credit counseling service. They can provide help with budgeting and possibly get some creditors to reduce your interest rates and/or payments.

Credit counseling services usually require you to close your credit cards, which can cause your credit scores to drop. 

Debt settlement

An emergency like job loss, medical problem, death of a wage earner, divorce, or family catastrophe can leave you unable to pay your bills. Debt settlement is a solution for debt problems that threaten your financial security.

What is debt settlement? Debt settlement means offering your unsecured creditors less than you owe and asking them to consider your account paid in full. Usually, you stop making your monthly payments in order to save an amount to offer your creditors. You can speed up the settlement process if you already have some savings or if you can borrow some money – perhaps from your retirement account, a family member, or a personal loan vendor. 

Debt settlement is private, and you can negotiate with creditors yourself or work with a debt settlement company. Unlike bankruptcy, it does not create a public record. However, there is no guarantee that a creditor will accept your offer, and missing payments will damage your credit score. 

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Bankruptcy

Bankruptcy is the most drastic solution of all. You can discharge some or all of your debts through the bankruptcy court system. Chapter 7 bankruptcy requires you to give up your non-exempt assets to the court, which sells them and distributes the proceeds among your creditors as payment in full. With a Chapter 13 bankruptcy, you keep your assets and repay some or all of what you owe over time (usually five years). 

Once the bankruptcy court discharges your debts, any unpaid balances are zeroed. However, it’s not a get-out-of-jail-free card. Bankruptcy can be expensive with filing fees and attorney costs. It’s public and stays on your credit report for up to ten years. Some careers are off-limits to people with a bankruptcy in their past, and filers are ineligible for many mortgage programs for several years.

Avoid Financial Problems and Find Happiness With Debt-Free Living

Living a debt-free life (or a nearly debt-free life) is possible no matter how bleak things might appear now. It just takes resolve, a plan, and sometimes professional help.