One of the keys to financial independence is to remain debt free. It may sound simple; however; most Americans owe a substantial amount of debt. Whether it’s a car loan, a mortgage, or student loans, liability occurs in all income ranges, from 20k to 150k and more.
To increase wealth the first step is not to owe anyone cash. It’s one thing to owe someone money; however; it’s another to owe money plus interest. Interest payments are a game breaker.
An individual can end up paying double or more due to the interest owed on the principal amount. Imagine all the money you’re spending on interest, wouldn’t you instead want to use it on something more beneficial, such as a savings or investment?
There Is No Such Thing As Good Debt
Yes, that includes student loans and mortgages. Sure you can make money with a mortgage from the equity you earn. Indeed, in today’s low-interest rate environment, a mortgage may be beneficial as low-interest rates help inflate a housing
Furthermore, if you manage to sell your house before the bubble burst, you’ll more than likely make a nice chunk of change. However, it’s a gamble because at any point in time the house could end up underwater, usually when rates rise.
If you’re not looking to sell your home but merely want to live in it, understand this if your mortgage rate is around 5.5% you’ll likely to pay double the principal amount in interest alone.
If You Want To Live Debt Free Avoid Student Loans
How about student loans? These loans are the worse, avoid them at all costs. Yeah, I know the degree is supposed to help with better job prospects. However; the keyword is SUPPOSED to help.
The cost of college continues to skyrocket costing students anywhere from 20k per year for state schools to 80k per year for prestigious schools.
That’s 80k or 240k for attending college for four years, assuming you skip the junior college route. It could take a lifetime to pay off if one decides to pay for their college education via student loans. If you take on this debt, chances are you won’t be living debt free for quite some time.
The unfortunate thing is that most college students are going to college to earn a degree in psychology, sociology, art, business, subjects that provide little valuable job skills. However, even if you’re going to college to be an engineer, avoid student loans as much as you can.
Debt Limits Your Ability To Save
It’s quite simple if you’re spending $400 a month on a monthly obligation then you’re not saving $400. Remember being debt free and having savings is the key to your financial success.
After you pay your living expenses, anything left over can be contributed to savings. Hopefully, the money you saved can go towards a passive income stream.
There’s not much one can do to grow their financial wealth if they do not have any savings. As the saying goes, “It takes money to make money.” Moral of the story, don’t’ spend your savings on debt unless its to pay the debt off.
Yes, Build Up Your Credit
Although you want to remain debt free at all costs, it’s still wise to build up your credit score. The good news is, you don’t need to go into debt to build credit.
One of the best ways to build up your credit score is to apply for a credit card, use it once a month and pay the balance once your statement is available.
Of course, the trick is to have discipline and only use the card on a small acquisition. Yes, it’s tempting to use it on a more significant purchase and pay off the balance in monthly installments, but remember you’re paying interest and that interest payment can go towards something else.
I am Living Debt Free Why Do I Need Credit?
Even when you’re debt free, you still need a credit history. Often landlords will check your credit history to see if you’re a viable tenant. Plus you may never know when an emergency strikes and your savings isn’t enough to pay for your needs.
However, if that does happen and you need to use your card, remember to pay off the debt as soon as you’re able too.
If you manage to avoid debt and live a debt free, you’ll have a lot of financial opportunities. You will be able to save, set financial goals, and enjoy many of the things life will have to offer.