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From Debt Free Dude
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[edit] Living Debt Free
Einstein once said that the greatest discovery of all time was compounding interest. Usually people use this to explain why you should put money into the bank. However, I would like to suggest that it works the other way. The most dangerous thing you can come up against isn't terrorists, gangs, organized crime or war. The most dangerous thing in the universe is debt.
The reason debt is so dangerous is the same reason that compounding interest is so powerful. Money produces more money. Debt produces more debt.
There is a very close relationship between your personal freedom and the way you handle money. Notice I didn't say that there is a close relationship between your personal freedom and the amount of money you make. There are many people who make a tremendous amount of money, but are still bound by debt because they live so far beyond their means.
Living debt free is about more than just not having any debt. It is about managing your finances and investing in ways that are financially wise.
[edit] Controlling Your Spending To Get Out Of Debt
Most people try to get out of debt by making more money. The problem with this approach is that the average person has very little control over how much they make. When people try to pay off debt by asking their boss for a raise, they are starting at the wrong end of the problem.
Being in debt keeps you from taking risks. People are financially rewarded for risks. As long as you are unable to take risks, you will have very little control over the amount of money you make.
So if you want more money, you first need to get out of debt. It doesn't work the other way. You cannot just make more money to get out of debt. Even if you did, it is likely that your spending would just expand to use the new income.
To get out of debt, you have to learn to control your spending. This is not easy, it takes a tremendous amount of discipline--much more than the average person has. Anyone can control their spending, but most people will not actually go to the trouble to reduce the amount they spend.
When you take a long hard look at your personal finances, it is likely you can find 10% or more of your spending isn't really necessary. The first thing you need to do is track your spending. Money that you can't account for is most likely to be going for things you don't really need.
By eliminating unnecessary expenses, you should be able to at least put yourself in a position where your expenses don't outpace your income. This won't get you out of debt by itself, but it is a good first step. The next thing you need to do is lower your expenses even more by changing your lifestyle.
[edit] Changing Your Life Style To Help Pay Off Bills
Most people don't want to change their lifestyle--even to get out of debt. Changing your lifestyle means giving up things. It might mean taking a simpler vacation at a nearby campground instead of a Caribbean resort. It could mean doing away with cable television or a second care. It could mean canceling your cell phone service or even selling your house and moving to a cheaper place.
To get out of debt, you will have to start living well below your means. You need to free up extra money to pay off your loans. The only way to make that happen is to start making sacrifices in other areas. If you are unwilling to make lifestyle changes you are in good company. The vast majority of Americans will be in debt until they die.
The main problem is that people tend to see downgrading their standard of living as a negative thing. Part of this is peer pressure. The people around you may be getting new cars, bigger houses, new gaming systems, bigger televisions, etc. You will have to decide that keeping up with everyone else is less important than financial freedom. If you want to truly be free, you are going to have to take some steps toward lowering your expenses and that will probably mean doing away with some of the nice things that all your friends have.
Don't forget your friends are probably just going into debt to maintain their standard of living. Don't let peer pressure keep you from taking steps toward getting out of debt. Your friends may not understand at first, but if you apply the discipline necessary to live debt free, you'll eventually be in a position that they will all envy.
[edit] Home Mortgages
Usually when people talk about becoming debt free, home mortgages are considered to be in a different category. That is because traditionally, home mortgages have been very safe good investments. You can usually sell your house for more than you paid for it, so banks charge minimal interest. As a result many people make money when they sell their house over what they would have had they rented a place.
It is important to understand that house prices don't always go up. Also you may need to sell your house for a very low price if you need to sell the house and move quickly because of a job change or other reasons.
Right now there are sections of the country where houses are going for half of what they were just a few years ago. The problem is that for many of these home owners, they can't sell their house because it they don't have enough money to pay off what would remain on the loan once they sold. To make matters worse, many of the places where this is happening are in areas that have lost a lot of jobs recently, so there is a glut of houses being sold. As more people put their houses up for sale the home values continue to drop.
If you want to be debt free, you need to make sure you are careful about how you approach purchasing a house. Ideally you want to buy a house when everyone else is selling. You should also be careful not to over extend yourself. Don't try to get the biggest house possible. If you end up in a situation where you have to move, you may end up paying on the home mortgage for a few years before you are able to sell it so you want to make sure you can afford another place if necessary.
People usually consider renting to be a waste of money, but this isn't always the case. In some areas rentals include things like water and heat which can cost you hundreds of dollars per year if you are paying for them in a house. Also keep in mind that the upkeep you have to pay for on a house is usually quite substantial compared to what you would pay on a rental.
[edit] Summary of Living Debt Free
Getting out of debt and living debt free is not something that just happens without effort. Most of the people in the US are going deeper into debt every year. If you don't want to follow the trend, it will take significant effort on your part to make a plan to get and stay out of debt. Following the suggestions in this document will make for a good start on your debt free journey.
