At a Glance

Becoming debt-free can be a challenge, especially if you’re deep in debt. But there are specific measures you can take to establish a debt-free lifestyle.

Follow these guidelines on how to be debt-free, and you’ll be on your way with a debt-free plan.

  • 6 ways to live a debt-free lifestyle
  • Benefits of debt-free living
  • Risks of debt-free living
  • What to do when you get debt-free
  • What percentage of Americans are debt-free?

To live a debt-free lifestyle, do these 6 things

1. Save money

This seems obvious enough. But many experts advise putting money into savings or a retirement account over paying off the money you owe as a long-term strategy. While this seems counterintuitive, ultimate, the savings can help keep you out of debt.

Experts also recommend keeping emergency savings stocked. The size of your emergency fund will vary based on your lifestyle, where you live, etc. But the general rule of thumb is to have enough for at least three to six months’ worth of expenses.

2. Invest

Investing is probably far from your mind if you’re trying to get out of debt. But while getting out of debt is important, you also want to think about building wealth. The U.S. Securities and Exchange Commission offers guidance for investing.

3. Use credit cards responsibly

To avoid paying interest and carrying revolving debt, don’t buy more than you can afford to pay off each month. If you do have credit card debt, make sure to make more than the minimum monthly payment to help you get out of debt more quickly.

4. Have adequate insurance coverage

Having a good insurance policy can help protect you from paying huge out-of-pocket expenses on medical bills. According to a 2019 study, about 137.1 million adults reported having “any medical financial hardship in the past year.”1

If you’re uninsured, you could qualify for a hardship exemption, meaning you don’t have to pay a fee for months you didn’t have coverage. Hardships include homelessness, bankruptcy, and more.

But managing risk goes beyond medical insurance. Skimping on auto insurance can also backfire if you’re in an accident or have other damage to your car.

5. Avoid overspending

Impulse buying is a key factor to overspending. According to a May 2020 study by Slickdeals, the average American will spend more than $2,100 a year on impulse buys.2 That figure is up 18% from before the global COVID-19 pandemic. Put a spending plan in place and try to put in place self-discipline as much as possible.

6. Create and stick to a budget

Putting all your money into paying off debt can be problematic. The general rule of thumb for budgeting is the 50/30/20 rule. With this strategy, you put 50% of your monthly after-tax income toward necessities. This includes rent/mortgage, utilities, groceries, insurance, and anything you need to live. Another 30% should go toward wants, like streaming services or cable. And the last 20% should go toward savings and paying off debt.

Benefits of debt-free living

A debt-free life can come with many positives.

1. Cut down on financial stress

In the American Psychological Association’s latest Stress in America survey, 70% of respondents found the economy to be a significant source of stress.3 That figure is up from 46% in the 2019 survey. Getting out in front of debt can help reduce stress levels, which in turn can improve your health.

2. Improve your credit score

A significant amount of debt can harm your credit score. Your credit utilization ratio, or how much you owe compared to your credit limit, makes up 30% of your credit score. Paying off your debt can help that ratio and improve your credit score.

3. More money to invest

If you’ve been putting off investing because of your debt, a debt-free lifestyle can give you room to invest. The more you’re able to invest, the better off you’ll be down the road, thanks to compound interest.

4. Ability to give generously

Being in debt can hold you back from donating. Getting out of debt can give you the ability to give to charities and causes that you feel strongly about. There are many studies that suggest giving to strangers can make you happier.4

5. Work-life balance

Find yourself picking up extra shifts or working overtime to help pay down your debt? Once you’re out of debt, you can take that time back for yourself. Work-life balance is important in maintaining a healthy lifestyle.5

Risks of debt-free living

While living a debt-free lifestyle seems to be the healthiest financial decision you can make, be wary of going too far. You don’t want to completely cut ties with credit. If you do need a loan in the future, you’re going to have a harder time getting one.

Your length of credit history makes up 15% of your credit score, so eliminating credit will shorten your credit history. New credit and mix of credit each make up 10% of your credit score. Merely maintaining active credit accounts makes up 35% of your credit score.

Use credit cards wisely or try a secured credit card-if you don’t trust yourself. This can help you keep your credit history intact without carrying revolving debt.

What to do when you get debt free

Once you’re finally able to eliminate your debt, you should ramp up your savings. Start by focusing on retirement contributions. From there you can start thinking about other things like travel, college funds for your children or future children, a down payment for a home, or another major purchase. This is also the time to focus on investing.

What percentage of Americans are debt free?

According to the Pew Charitable Trusts, 8 in 10 Americans have some form of debt. That means just 20% are debt-free. Mortgages are the most common liability with 44% holding mortgage debt. But with the above tips, you can join those living debt-free.