What is Debt Free Living?

It’s hard to live debt free in America. Total U.S. household debt reached a record high of $14.15 trillion in the fourth quarter of 2019, according to the Federal Reserve.¹ That means most American adults either carry a mortgage, owe on a car, face monthly student loan payments, roll over charges on their credit cards—or all of the above.

And yet, over half of Americans surveyed (53%) say that debt reduction is a top priority—while nearly a quarter (23%) say they have no debt.² And that percentage may rise. Research suggests that millennials, who reached adulthood just in time for the Great Recession, may be particularly risk-averse. A separate survey showed that 11% of millennials had never been in debt, compared to 8% of GenX respondents and 5% of baby boomers.³

But living debt free in modern society has its own major challenges. Just try buying a home or leasing a car or signing up for a cell phone plan without a credit score—your (metaphorical) certificate of lifetime achievement.

So, after weighing the pros and cons, many who take up the debt-free challenge are not necessarily asking themselves how to live completely debt free. Instead, they ask: How close can I come to living debt free? How do other people do it?

The definition of “debt free” isn’t set in stone. One school of thought sees living debt free in absolute terms: zero debt of any kind. A looser approach keeps your mortgage out of the equation, since that’s an investment in an asset (your house) that should grow in value over time.

Purists applying the strict definition of debt free tend to avoid credit cards, while debt free living pragmatists see cards as necessary for certain transactions, as long as bills are paid on time and in full every month. Another consideration is that establishing a credit rating can save money on other life necessities, such as insurance,⁴ and can be handy in the event of an emergency.

The definition you choose will guide your plan for living debt free—or at least coming close.

Debt has its upsides and downsides. On the one hand, a student loan can help you get an education and increase your earnings potential. A mortgage could be your entrée to home ownership. Credit cards can smooth out the highs and lows in the cash you have available.

On the other hand, debt costs money—it’s not uncommon to spend hundreds of thousands of dollars in interest over the course of a lifetime.⁵ Online calculators readily provide the total cost of your loans. For example, a $300,000 mortgage at 4% interest over 15 years ends up costing $100,000 in interest charges.⁶

What’s more, the obligation to pay debt in a timely and responsible fashion can keep you tied to a job that you don’t like or otherwise limit your lifestyle choices. The penalties for falling behind can be severe.

Each step toward living debt free looks big: make a plan, get rid of existing debt, live more simply, develop good money habits, and maintain discipline. The payoffs can be just as big, according to advocates, including less stress, more cash, and greater financial independence. The trick is to break each step down into smaller, meaningful action items tailored to your situation, to build on successes along the way. You should also be realistic about the time frame you set, because it won’t happen overnight. You could even take a trial-and-error approach if the going gets tough.

Make a plan. This is a very personalized exercise whose elements could include anything from taking a second job to downsizing your home to dipping into savings. But any plan should have a few things in common: specific objectives, available resources, action items, timelines—all the standard but too-often ignored elements of successful planning. For more insight into the planning portion, see "How to Make a Monthly Budget, One Step at a Time."

Get rid of existing debt. The Consumer Financial Protection Bureau provides a guide including two common methods: the avalanche and the snowball.⁷ The avalanche involves paying your highest-interest debt first, for the greatest savings. The snowball involves paying your smallest, easiest debts first, for psychological motivation.

Live more simply. Debt free living advocates are numerous and vocal on the web, and their many tips for a simpler life range from buying used clothes to selling your car to spending more mindfully.

Develop good money habits. This is another step for which the web can provide untold resources. Some ideas to start with: auto-transferring money into savings, planning your purchases, paying bills on time, and investing regularly.

Maintain discipline. As financial stress recedes, it can be tempting to revert to old money habits. You know yourself. Maybe you’ll need progress rewards, the buddy system to hold you accountable, or another mechanism to keep you on track. Factor these into your plan. And consider it part of your discipline to revisit and revise your plan on a regular basis.

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