Being in debt is one of the most stressful experiences in a person’s life. If debt is not managed carefully, the accruing interest and penalties can balloon out of control, leaving most to feel that their efforts on becoming debt free are futile.
Being in debt when you’re under 30 is not unusual, but it is a difficult situation to navigate. You’ve likely just graduated from school and don’t have a lot of work experience to translate into a well-paying career yet. Combine this with the four to five years of school most attend to earn a college degree and you have, on average, $40,000 of student loan debt before you even get started in the work world.
But there are secrets to becoming debt free by 30. These five tips are a combination of good preparation, planning, a desire to commit, and lots of effort. The good news is that these five steps to becoming debt free by 30 are life skills that can be used in other ways for the rest of your life. Becoming debt free is a valuable life lesson not only for paying off your debts but also to help you maintain a debt free life. Here are the five rules to becoming debt free by 30:
Becoming Debt Free Rule 1: Spend less than you make.
Rule number one in becoming debt free by 30 is perhaps the most important. Regardless of what your income is, live within your means. We don’t need as much as we think we do! Find ways to simplify your life and do without all the stuff. A reality check at this point is required. Do some soul searching to find what really makes you happy.
Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like. –Will Rogers
Spending less does not have to mean complete self-denial. Instead, prioritize the things that are important to you in life. A backpacking trip may be a more valuable way for you to spend your money than a flat screen tv or a new car.
Remember that If you have to buy stuff on credit, it’s probably a red flag you don’t need it. And this is a place where you do want to sweat the small stuff. It’s usually the little indulgences that are no brainers that wreak the most havoc on your goal to becoming debt free.
The perfect example of this is what happen’s when you spend $25.00 per month over twenty years. $25 adds up to 4 or 5 Starbucks lattes per month. Doing simple math, those lattes that add up to $25 per month mean you’ve spent $6000 over 20 years. But the shocker is what that would amount to if you consider it as compounding credit card debt. Let’s say that you have a credit card with a reasonable average rate of 14%. $25.00 of credit card debt per month when compounded adds up to about $30,000.
Compounding debt is the perfect example of why not spending as little as $25 per month can help you go a long way towards becoming debt free by 30.
In an article for Time, Jeff Yeager, author of How to Retire the Cheapskate Way has some good, actionable advice: “Go on a fiscal fast: Do your essential shopping, then try to go a week without spending any additional money (cash, credit, or debit). You may be surprised at the places where you don’t feel the pinch.”
He also suggests that people conduct a “What was I thinking?” audit. When you analyze how you spend money after the fact, you can clearly see how you actually spent your money and not how you wish you spent it. A good way to analyze your spending habits is by going through your bank and credit card statements both monthly and annually to see how expenses add up.
In conclusion, keep it simple and spend less than you make. Either find ways to cut expenses in your life to offset your monthly income versus expenses or be vigilant about your spending habits. And a good reason to do so is the next step.
Becoming Debt Free Rule 2: Save money regularly, no matter what.
Once you start spending less than you make, you’ll have some extra cash to work with. Get into the habit of saving automatically, even if it’s a small amount. Setting up an electronic transfer from your checking to savings account on a weekly or monthly basis is a good way to guarantee you’re regularly putting money away.
Savings don’t have to take a big chunk of your income, especially if you’re in the “becoming debt free by 30” phase. As little as ten percent of your income for savings adds up over time.
The purpose for building your savings is so that you have an emergency fund for the little (or big) unexpected things life throws at you. Having money put away for a rainy day keeps you out of having to turn to debt products like loans or credit cards to cover the unforeseen expenses.
Automatic savings or the regular practice of saving is a technique that could keep many Americans ready for emergencies and out of spiraling into further debt due to unforeseen events.
According to CNBC, only 22 percent of the 1,000 adults surveyed by bankrate.com said they had enough to cover expenses for six months—a five-year low. Another 15 percent said they have savings equivalent to three to five months, and 21 percent can cover less than three months.
But these figures don’t mean catastrophe for every individual with less than six months worth of savings. Like most things in life situations can vary—building a savings emergency fund is unique, according to each individual and what their needs and circumstances are.
The CNBC article suggests that one should decide on how big of an amount is needed according to several factors. These factors are:
- Your job security. If you freelance, own your own business or have other types of uncertain income, your emergency savings fund should be bigger to cover longer non-work periods.
- Skill marketability. How sought after are your skills in the workforce? If you have highly niche or specialized skills in a field where there is not a lot of opportunity for work, it’s a good idea to sock some extra money.
- Possible emergencies. While the first couple of suggestions involve possible job loss, which may not be a reality for many who are not in the workforce yet, another consideration of the likelihood of possible emergencies. While emergencies can’t be predicted, some factors like poor health, an old car that may break down shortly, or owning a home mean that things could more than likely go wrong. Renters can call the landlord when something stops working and expect it repaired on the landlord’s expense. But when you own your home or condo, a plumbing problem is your out of pocket expense to bear. Save more for these types of emergencies.
- How many other assets do you have? If you own assets like investments, collectibles, or jewelry, you may be able to live with less in your emergency fund. The reason is because your assets can be converted into cash by selling them or leveraging them into an asset-backed loan.
Have the savings mindset ready for all you do. Save for emergencies, save for special events and save for things you’d like in the future. When you buy that which you can afford or have saved up for, your path to becoming debt free by 30 is a little shorter.
Becoming Debt Free Rule 3: Don’t finance purchases.
If you can’t afford it right now, save for it. Don’t finance purchases, you’ll be adding to your debt and paying expensive interest. Some of the most common and costly ways people use financing to buy things include credit cards and automobile loans.
Buying a car is one of the biggest expenses most consumers have after a home or college. But when you lease or buy a brand new car, you are throwing money away. Even worse, many who buy new cars “trade up” and buy a new one every three to four years.
New cars are not investments. They lose up to 75 percent of their value the first four years.
The same goes for car leases, where you end up paying top dollar for a depreciating vehicle you’ll never own.
Save money by buying a good, used car and drive it as long as possible. If financing is necessary, look at the total cost you will be paying for the car including interest and any other fees. A monthly payment may sound like a good amount, but how much is it really costing you above the cost of the vehicle over the life of the car loan?
Becoming Debt Free Rule 4: Focus on paying down your debt.
Paying your debt down should be a top priority. Start with paying off the highest interest debt first. This is often credit cards, but for many under 30, the biggest and most expensive debt is their student loans.
According to the New York Federal Reserve, student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008, passing both auto loans and credit cards.
To get closer to becoming debt free by 30:
- Pay more than the minimum monthly payment owed.
If you make sure that you always pay more than your minimum payments, you will pay down your debt faster and save money on interest. Making the minimum credit card payments each month means that it will take years to pay off your balance. Pay as much extra as you can afford. To get motivated, use a financial calculator to see how much money you can save on interest doing this.
- Pay off your most expensive debts first.
Make a plan to pay off the minimum that you can afford to each debt every month. But make sure that you give the most high interest or expensive debt special attention. Focus all of your extra cash on paying that one debt off first in extra monthly payments.
Once the first, most expensive debt is paid off, use all of the money you were paying towards the first debt to pay off the next most expensive debt. Continue using this technique to pay down each of your debts until you are done and debt free. This strategy will help get you out of debt faster—and you will feel hopeful by your progress as you go.
Becoming Debt Free Rule 5: Find new income to become debt free sooner.
Sometimes all the planning and discipline isn’t enough for getting out of debt by 30. The best solution to getting out of debt is to have more money to pay the debt off. Pick up a second job, or regularly taking on an extra work shift or two will be a powerful way for many people to pay down their debt faster. If you can make this strategy work, becoming debt free by 30 will be a reality.
But for this method to work best, you must use all of the extra income you’ve earned towards debt repayment. And having a goal and a timeframe is a life saver. Working the extra shifts or job doesn’t need to be a permanent situation. Once you take control of your debts and your spending habits, you can go back to less work.
Another alternative to extra income from a side job for debt would be to sell things you don’t use or need. While this is a temporary task, converting some of the items you own but hardly use into cash could help put you on the road to becoming debt free by 30 quicker than you think!