Living a debt-free life

Being debt-free means having no outstanding debt in your name and owing no money to any individual or organization.

Though many people aspire to attain this state of financial freedom (i.e., having no debt), very few do.

?Living debt-free is not always practical; sometimes, taking on debt is necessary for the greater good. Debt-free living has its pros, but it also has its cons. There are good debts as well as bad ones. Some debts are essential to seize opportunities, and some can be leveraged to reach your financial goals faster.

Mortgages and student loans are examples of good debts.

With the help of a mortgage, you can finance the purchase of a real estate asset and spread out the payment of the purchase price over time rather than having to pay it all at once. For example, taking out a mortgage now to purchase your own house and paying it off overtime will be less expensive than the overall cost of paying rent for an additional five to ten years until you can afford to buy your own house and then paying a higher price to buy the same house (because the value will have appreciated). In this case, the debt you’ll have incurred because of the mortgage helps you save costs in the long run, and you also acquire an asset that will appreciate in value.

?Student loans are available to help students pay for their education. Students are required to start paying the money back when they finish school and get a job. Incurring this debt enables one to complete one's education and have a better future. It is a good debt, as you can’t stop your education forever because you can’t afford to pay for it.

These two examples demonstrate that not all debts are harmful; some are required and beneficial to society.

?Instances where debt can be considered bad are:

• When it is incurred on luxury items or designer clothing that will lose value over time,
• When you borrow to spend more than you can afford just because you want to show off and “keep up with the Joneses,”.
• When you borrow money to buy assets that will depreciate over time, e.g., a car or a phone,
• When you borrow to meet your wants rather than your needs.

?You wouldn’t have incurred these debts if you had stuck to your budget and only purchased what you could afford, but often, when people live above their means, they must borrow to maintain that lifestyle.

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Please be aware that debt is not only incurred when you borrow money. Some brands offer a “buy now, pay later” plan. You pay a deposit for a product and pay the balance in instalments over a period of time. I know some brands that let you purchase devices, like phones, TVs, laptops, cars, and so forth, with a down payment and then pay the remaining balance over time in instalments.

?It is important to exercise caution with this kind of plan because it is easy to get carried away and buy items you don't really need or can't afford, given your income. At times, people who use these plans don’t have the money to pay the balance and are aware they will struggle to keep up with the subsequent payments, but because they are not disciplined, they go ahead and purchase that item. As a result, they find it difficult to pay the balance and might even be forced to borrow to pay, which further drags them into additional debt.

?Taking advantage of such an offer is not a bad idea if you can afford to pay for the product and your income can sufficiently cover the subsequent payments, but if this is not your case, avoid such plans.

Tips to Avoid Debt?? ? ?????????????????

1. Create a budget and stick to it. Creating a budget that clearly outlines your income and expenses helps you understand your financial situation and limits. It provides guidance on how to manage your finances and makes you financially disciplined. Adhering to a budget will prevent impulse buying and help keep track of your spending.
2. Live below your means. This means spending less money than you earn. It is avoiding a lifestyle that makes you spend beyond what you can afford. This can only be achieved by following your budget judiciously. You incur debt when you spend more than you earn.
3. Build an emergency fund. One of the major reasons people borrow is to cover unexpected or unplanned expenses. Saving for emergencies reduces the need to borrow debt at high-interest rates to fund urgent expenses.
4. Prioritise paying your debts. Paying off debts you have already incurred should be your top priority, especially for those with high-interest rates. The longer you delay the payments, the more interest accrues, making it more difficult to pay; apportion as much as you can from your income to settle your outstanding debts.
5. Increase your income. If your needs or expenses force you to borrow money on a regular basis, you are probably not earning enough to support your lifestyle or responsibilities, so it's advisable that you work on increasing your earnings. You can look into side gigs, improve your skills to get better opportunities, get a better-paying job, and so on.
6. Cut out the wants and focus on the needs.
7. Pay with cash. Avoid overspending on credit cards and use cash to make your payments as much as possible. If you must use credit cards, make sure you pay them off on time.

In conclusion, staying out of debt depends on our financial choices and habits cultivated over time. Healthy financial choices we make regarding our finances, such as budgeting, cultivating a saving culture, avoiding impulsive spending, and practicing financial discipline, eventually lead to healthy financial habits.

In my next post, I will address how we can manage debts we have already incurred, plan a debt repayment strategy, and break free from debt cycles.

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