I absolutely detest debt. The idea of having a financial obligation as a monkey on my back is not something that works for me.
By carrying debt, and using cash flow to pay it off, you’re not directing income toward savings. By postponing savings, you’re forcing yourself to work more – whether more hours during the week or month, or for more years in total. To me, financial freedom is a long-term goal, and debt inhibits the accomplishment of that goal. Most of us would like to reach financial freedom, right?
So, with that in mind, I have come up with 5 rules for staying free and clear of debt:
- Visualize Working Hard While Old. Does this take you by surprise? Well, I know it’s a bit unusual, but it’s what works for me. Give it a try, and think about it. Realizing how people that are well past traditional retirement age tend to have less energy and more health issues that those of us much younger, it stands to reason that we don’t want to be in that position of having to work then. Envisioning it is a real motivator to avoid debt, and free up cash flow for retirement savings.
- Pay Yourself First. Put money away for yourself upon receiving it through your income. Set it aside, then forget about it. Well, don’t really forget about it, but make the effort to prioritize savings. This way, if you really need money for whatever reason, you have it. You won’t have to go into debt, and can prevent such a situation from arising.
- Pay Off Credit Cards in Full Each Month. No matter what you might charge within a given month, focus on debt reduction and make a plan to have it paid off in full when the bill comes due. Interest charges and late fees can be very costly. If you do have it, pay down debt without taking from other sources. For example, using 401k for credit card debt.
- Know Your Expenses. This can also be seen as learning how to budget, or spending within your means. Either way, the key action point is to understand where your money goes, and how much you can effectively spend each month. And part of knowing your expenses includes knowing wasy to reduce those expenses; for example, if you have to make home improvements, think about shopping around, getting multiple bids for work, and remembering the 2011 home improvement tax credit. Bottom line: know what you’re spending and how it can be smartly reduced.
- Discern Wants from Needs. There are some things that are needs, such as food, shelter, and basic medical care. Then, there are are similar things that are wants – an expensive dinner, a newly constructed McMansion, or cosmetic vanity procedures. Or, more pervasive, smaller expenses that chip away at your cash flow. Wants are wonderful, and needs are just that: things you need. Understanding this distinction can help you get out of debt, or avoid it altogether.
Do you have any rules for keeping out of debt?
Simple truths, very succinctly put! The most powerful of them is the first one – imagine being old and not having enough and no one’s going to hire you. Scary thought, but a very great motivator!
Wish you a very happy 2011 Squirrelers!
Moneycone – after going over my list again, I too think that the first one is the most powerful. Really, it’s that thought of being old and having nowhere to turn that’s a big motivator.
Simply put! What has motivated me to get serious about my savings is the idea of eating cat food and pushing around a shopping cart when I’m old! I’m finally seeing “retirement” as a not so distant reality. Very scary!
Little House – it’s funny how all of a sudden retirement can seem like a not so distant reality. I’m really getting focused more and more on that aspect, really thinking about what life could be like without proper funds. Cat food is not a pleasant thought, I agree!
I particularly like the visualization tip. Very unique. There is so much research on the power of visualization, from weight loss goals to peak performance. This one’s going in my round up!
Barb – thanks! Looking forward to the roundup. As for visualization, I’m a big believer in it. It can be motivating from positive and negative approaches. In this case, avoiding the negative is a strong motivator.
I totally agree with you on 2-5. My only debt is my mortgage, I live 2-5. I want to keep busy with things I find interesting and enjoyable in my latter years, that motivates me to reach my goals.
Krantcents – yep, who wants to spend later years doing things that you need to do, when you have less energy to do such things. Would be nice to take it easy and do what you find interesting and enjoyable….even if that’s work on your own terms!
#1 is key. I’ve already noticed a difference in a decade. You can only burn the candle at both ends for so long. I hope to have to work less and less for every decade that goes by. In most cases, people go into savings overtime in their 50’s and I don’t want to stress about my golden years by then.
First Gen – I totally get what you mean, and that difference is noticable for some of us. One just needs to look at how energy levels changed over their own lives, and look at the energy level of older people you know, and it becomes evident that burning the candle on both ends just isn’t sustainable.
I like #1! Hell no I don’t want to be slaving away when I’m old and gray!
Sam – yep, I’m right there with you. I don’t want to be in that position either!
Paying Yourself First has always worked for me. Once you take that chunk of money out of your cash flow, its easy to have it save (or pay bills) and you know exactly how much left you have to actually work with.
Twentysomethingmoney – Paying yourself first is wise. Why make others rich at the expense of your own future? It’s that simple conceptually, spending first on your security and then on expenses. Live on what you can afford to live on.
This one’s an oldie but goodie: Look at what you want and figure out how many hours (post-tax!) you will have to work to earn it.
Do you want it badly enough to buy it? Okay, do it — but pay cash.
Donna – that’s a good one, and it’s so old school that many of us forget it. I’ve used this example myself, but lost sight of it. I think it’s time for me to revist this in the form of a new blog post. Thanks for the inspiration!
Absolutely rules to live by. Well said, Squirrelers. I visualize myself commuting at 65, and I get that itchy, hivey feeling.
101Centavos – I find that visualizing working while much older gets me energized pretty quickly. Avoidance of potential living nightmare can do that!
Hmm, working hard will hold isn’t something I want, unless it’s at my own company, then perhaps. 😉
I hold some mortgage debt, but other than that I’m not that fond of the idea, either. I’d like to pay down the mortgage quicker or at least offset it with heavy savings.
Invest It Wisely – In terms of mortgage debt, I have always held it as one acceptable debt. I have taken on 2 different mortgages. Now, I am getting a different perspective in that I view a mortgage as being quite similar to other debt, in that it’s money being spent on creditors instead of retirement. Of course, shelter is necessary. I just don’t like debt:)
I totally paid off my credit card once. Now it’s back up to $5000. The reason it crept up again is because saving for a rainy day, or saving for something that I wanted wasn’t in my plan. So when the large car repair was needed, it went on the card, or the new TV when the old one broke, or the trip to Disneyland that we planned but didn’t save for (duh). It’s common sense for most, but I guess I needed to learn the hard way.
Lindy Mint – hey, it’s ok. We all learn from our experiences, and stuff happens. The idea that you have a personal finance blog and actively read others, tells me that you’re on the right track big picture.
I’m too lazy to work when I’m old.
I hate seeing how much I pay in interest each time I pay my student loans. But I also want to buy a house, and I can’t see doing that without a mortgage for many years to come…
Kellen – funny how you mention being lazy to work when old. I have to tell you, as I’m not getting older and on the cusp of my 40’s, the energy level is not quite the same as when one is younger….and if I project forward, I realize that I don’t want to be working late in life!
Visualizing myself old and working hard (driving a truck full of lumber and unloading it myself in some remote location) makes me want to scream. Because I am still working on my debt. And will be for a few years. And that’s why I might not fund my retirement enough and end up driving that truck. What a nightmare!
Aloysa – I can understand, when I have a similar visual for myself it’s not cool! I need to work for many more years, and don’t want to be broken down and have to do it. It’s motivating.
This is great advice. I especially like visualizing working hard when you are old.
There are too many people ignoring the future, so they can enjoy the present. There has to be some balance between past (debt), present (bills) and future (saving). Handling one or two of these isn’t enough. You have to handle all three to have a chance at a secure future.
Thanks, Bret. Well said, with your discussion of balance. It’s important to take care of each area.