Today, 36% of Americans have more credit card debt than emergency savings, and 35% would have to borrow to pay for an emergency expense of $1,000 or more. If you feel burdened by debt, you’re not alone.
Whether you’re burdened by credit card debt, student loans, medical debt or something else, you can dig yourself out of the hole and step into a life with less stress, improved mental health and more financial control.
Debt in the United States
- In the second quarter of 2023, Americans collectively held a substantial $17.06 trillion in debt. Credit card balances rose by $45 billion over the previous quarter.
- The typical American household owes more than $104,000 in debt, including student loans, credit cards, mortgages, auto loans, and other forms of credit.
- Gen X carries the highest debt burden, averaging $157,556 in total balances.
- More than half of U.S. adults (52%) say that financial concerns negatively impact their mental health.
- 22% of Americans have identified paying down debt as their primary financial goal for 2024.
What does it mean to be debt-free?
Living debt-free means having no outstanding payments or financial obligations on credit cards, personal loans, student loans, auto loans, medical bills, mortgages, utility payments or other types of debts. Some people still have a mortgage but consider themselves debt-free if all other accounts are paid off.
When you are debt-free, you cover your own expenses without relying on credit, friends or family. Any investments you make are owned outright without liens from banks or lenders.
Is it better to live without debt?
Some people assert the disadvantages of being debt-free. Without debt, you could miss investment opportunities and limit your access to credit-building experiences. Whatever choice you make, it’s important to understand the difference between good and bad debt:
- Good debt is backed by assets that can increase in value or generate income over time.
- Bad debt is used to purchase items that quickly lose value.
There are compelling arguments for “good debt” like mortgages, portfolio lines of credit and other investment financing. Only good debt can contribute to long-term financial growth, and any form of excessive debt strains your resources and impacts your well-being.
A debt-free lifestyle, meanwhile, has plenty of advantages:
- You don’t have interest payments and fees, which results in lower overall living expenses.
- You can redirect money toward savings and investments to grow wealth over time.
- You get to make decisions based on your personal goals instead of debt obligations.
- Your financial worries may decrease, which lowers stress and improves well-being.
- You might gain a greater sense of control over your finances, which can boost self-confidence and self-esteem.
- You may get into fewer money-related conflicts, which leads to stronger relationships.
- You may have more flexibility to pursue entrepreneurship, travel or higher education with fewer constraints.
Becoming debt-free can positively affect several aspects of your life and contribute to your long-term financial security and overall well-being. These benefits make being debt-free a worthwhile goal for many people.
However, debt, in itself, isn’t usually the problem — it’s the type of debts you have and how you manage them that counts.
How to be debt-free ASAP
If you’re determined to break free from debt, tailor a personalized and strategic plan to your financial situation. Here’s a comprehensive roadmap that shows how to get debt-free.
1. Evaluate your debt
Start by taking a close look at all your outstanding accounts to get a clear understanding of your situation. You’ll want to know the total amounts you owe with interest and how long it will take to pay off your debts.
It’s a good idea to pull a copy of your credit report. If your bank doesn’t give you access, you should be able to generate a free report through services like Experian or Credit Karma. Alternatively, you can get credit reports from the three major credit bureaus through AnnualCreditReport.com.
Compile a list of all accounts with outstanding balances, including:
- Credit cards
- Loans
- Mortgages
- Any other debts you owe
Write down the interest rate and minimum monthly payment associated with each debt. Your account servicer will have this information if it isn’t listed on your monthly statements.
Calculate the time it will take to pay off each account and the total amount you will pay with interest if you make only the minimum payments. For accurate insights, use a credit card payoff calculator for revolving accounts and an amortization calculator for mortgages and other accounts with fixed terms. Your lender should also be able to provide an estimated payoff date for fixed-term loans and mortgages.
Here’s a hypothetical example of what this list might look like:
| Account | Amount owed | Interest rate | Minimum payment | Estimated payoff date | Total cost with interest |
|---|---|---|---|---|---|
| Mortgage | $260,000 | 3% | $1,096 | April 2054 | $394,621 |
| Auto loan | $11,000 | 10% | $145 | April 2034 | $17,444 |
| Student loan | $19,000 | 2.75% | $129 | April 2039 | $23,209 |
| Credit card | $4,500 | 17% | $90 | April 2031 | $7,883 |
Looking closely at your total debt can help you prioritize and motivate you to stick to your payoff plan.
2. Choose a payoff strategy
Pick a debt repayment strategy that aligns with your financial goals and capabilities. Based on your situation, decide whether a DIY approach, a debt management plan, debt consolidation or bankruptcy is the right move.
A couple of do-it-yourself debt payoff strategies are particularly effective:
- Debt snowball: You begin by paying smaller debts first, then progress to larger ones. This method can provide a psychological boost as you see the debts disappear.
- Debt avalanche: You prioritize debts with the highest interest rates to minimize your total interest payments over time.
Comparing the debt snowball and debt avalanche methods can help you decide which approach aligns better with your financial goals and personality.
| Aspect | Debt Snowball | Debt Avalanche |
|---|---|---|
| Strategy | Pay off debts from smallest to largest balance regardless of interest rate. | Pay off debts with the highest interest rate first, regardless of balance size. |
| Psychological Impact | Provides quick wins by tackling smaller debts first, which can boost motivation. | Focuses on minimizing overall interest costs, which may take longer to see significant progress. |
| Interest Savings | May result in paying more interest overall, especially if higher interest rate debts are larger. | Typically saves more money on interest over time by targeting high-interest debts first. |
| Debt Payoff Time | Can lead to quicker payoff of individual debts, providing a sense of accomplishment. | May take longer to pay off the first debt due to focusing on high-interest balances first. |
| Suitability | Ideal for individuals who value quick wins and motivation, even if it means paying more interest overall. | Suitable for those focused on minimizing interest costs and are disciplined enough to stick with the method despite potentially slower initial progress. |
Choose the method that best aligns with your financial goals, personality and motivation style.
In either case, you continue making the minimum payments on your other debts while you focus on paying off one at a time.
You can also explore your options to consolidate high-interest debts into a single account with a lower interest rate. Options include balance transfer credit cards, debt consolidation loans, and home equity loans or lines of credit.
These options can simplify your payments and potentially reduce the amount of interest you’re paying overall. However, compare terms and fees before choosing a consolidation method.
When you consolidate debt, you can simplify repayment and save money over time. Sometimes, consolidation can decrease monthly payments and shorten your estimated payoff date.
As a last resort, consider bankruptcy if you cannot manage debt through other means. Bankruptcy is a legal process in which you declare your inability to repay debts and seek relief from financial obligations through court proceedings. With this strategy, you can eliminate debt quickly, but your bankruptcy will stay on your credit report for at least seven years.
3. Revamp your budget
To see how to get debt-free in six months, 12 months or another realistic timeframe, you’ll need to rework your budget to align with debt-free living.
First, identify essential expenses like housing, utilities, groceries and transportation to ensure they fit within your chosen budget structure. For example, you might explore the 50/30/20 rule. With this simple framework, you allocate 50% of your income for necessities, 30% for discretionary spending and 20% for savings and debts.
Cut unnecessary expenses and redirect funds toward your debt payoff efforts. A new and improved budget can help you stay on track and make tangible progress toward achieving a debt-free lifestyle.
4. Develop positive money habits
Perhaps it was impulse buying that got you into debt in the first place. If so, you may need to change your mindset to live debt-free. Emotional spending, often triggered by feelings like sadness, boredom, fear or insecurity, can quickly lead to spending beyond your budget.
To combat impulse spending and regain financial control:
- Learn to recognize the triggers that lead to spontaneous purchases.
- Find ways to steer clear of your triggers.
- Limit your exposure to online advertising.
- Explore budget-friendly and free ways to meet your emotional needs.
- Set new savings targets to give yourself something to work toward.
If you need help, seek guidance from financial counselors or reputable resources like the National Foundation for Credit Counseling (NFCC) to cultivate healthy financial practices.
Next steps
Becoming debt-free requires commitment and sacrifice, but the long-term benefits are invaluable. When you adopt sound financial strategies and embrace a debt-free mindset, you can achieve financial freedom.
Living debt-free is a journey worth pursuing for anyone seeking greater financial stability and peace of mind. Assess your debt, choose a repayment strategy and commit to smart and intentional financial habits. With determination and informed decision-making, you can chart a course toward a life free from the burden of debt.
Frequently Asked Questions
Being debt-free does not automatically hurt your credit score. In reality, responsibly managing credit and paying off debts can improve your credit score by showing financial responsibility and reducing your overall debt load.
Having no debt doesn’t mean you can’t build credit. Having and managing credit accounts wisely can help establish and maintain a positive credit history.
The ideal age for debt-free living can vary widely depending on your financial circ*mstances and goals. Striving to become debt-free by retirement age is a common financial target. Getting out of debt earlier can lead to positive financial, psychological and emotional outcomes.
