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 developing spending habits that support your goals and learning to manage borrowed money so you can avoid needing debt relief.

What Is Debt-Free Living—and Is it Worth it?

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. People who live debt-free are cautious about taking on good debt and careful to avoid bad debt.

Debt-free living is worth it from an emotional and mental standpoint. 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. Learning better money management skills can help you feel more resilient in the face of economic uncertainty and the possibility of financial upheaval. 

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 sometimes 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 best avoided.

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

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 doesn’t ultimately increase your happiness. 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, consider seeking professional help—such as mental health counseling or credit counseling to help you get a handle on your finances and develop a healthier relationship with money. 

2. Budgeting isn’t a dirty word

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 expenses that matter less. Make sure that your budget includes savings for emergencies and retirement as well as goals like travel or buying a home—or 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 you drive an expensive car or buy a bigger house, find better friends. 

4. Choose cheaper options

Depending on your location, owning 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 GasBuddy 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 versus 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 pause 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 goes away with a little time.

Decide at the beginning of the month how much you can spend on discretionary items (like meals out, movies, new clothes, or whatever makes you happy). Put cash for them 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. 

Start small, and go from there. Set a goal to save $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, like a devastating job loss or 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.

Building an emergency fund 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 back-up plan can make life’s surprises a lot less stressful.

8. Changing your habits

Living within your means and changing your spending habits is key to getting 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. 

Be cautious with sales and coupons—they can lead to you spending when you otherwise wouldn’t. Your favorite retailers are masters at employing clever marketing tactics. Those supposed money-saving deals that are designed to get you to spend more to save—BOGO, limited-time offers, or 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. Your budget plan can help—zero-based budgeting gives every dollar a job.

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? Here are five proven tools for addressing your debt. 

1. Debt snowball or avalanche

Two methods that can be effective for credit card repayment are the debt snowball and avalanche methods. 

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

2. 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.

3. 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 nonprofit 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. 

4. 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 you can offer. 

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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5. Bankruptcy

You can discharge some or all of your unsecured 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 three to 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 10 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—and it’s worth the effort.