For many people, becoming debt free is more of a distant dream than a close reality. I’m not yet 33, and yet I just became completely debt free. And I’m going to share with you some tips about how you can be debt free too, whatever your age.
To be clear, I’m not a pauper, and I don’t sit at home refusing to spend a cent on anything fun. While it’s certainly easier to become debt free if you live a more spartan life, that’s not something I want to do. I live in a nice house, I own a sports car, and I enjoy going to the movies and eating out occasionally. I’m about halfway to having enough savings and investments to retire. Many aspects of my life are boringly normal, but many aren’t, and they’re the secret to becoming debt free.
So how did I do it? Here’s the short version:
I suck at saving, so I tricked myself: I set up an automated savings facility with my bank. Whenever I got paid, I would automatically set aside some money for savings so I never saw the money. Out of sight, out of mind. I couldn’t spend it, because I didn’t really know it was there.
I use an ING Direct savings account; they don’t have ATMs, so it’s hard for me to use the money. I’d have to transfer it to my main bank account, and that takes a day or 2 to process. It’s harder for me not to save.
Spend less than you earn
I’m naturally reticent to use debt to buy things, which is apparently not all that normal. I can thank my parents. I don’t buy stuff on credit, I save for it and pay with cash. I’m really uncomfortable with the idea that someone can come and take my stuff away if I can’t make the payments for some reason. So, if I don’t have the cash, I don’t buy the thing. Mostly.
I’ve made a few exceptions, such as my car, my TV, and my house. I’m far from perfect. Ultimately, though, it paid off, and now I can afford most things without needing to use credit cards. Going into debt for consumable stuff that loses value as soon as you take it home is generally a bad idea.
Bad debt is like my car, which I bought new using a car loan. It’s an MX-5 convertible sports car, and I love it, but it cost a lot more than it was worth. It’s worth a lot less now, so I lost a lot of money on that deal. I’m too scared to find out exactly how much, so I haven’t worked it out.
Some debt is good, though. Good debt is the kind you use to buy something that increases in value. This is also called investing. Once I’d saved enough money for a deposit, I bought a house with a loan from a bank. I figured that since I was paying rent anyway, I may as well use the money to pay for my own place. That and I really hate the idea of someone else controlling whether or not I can put up pictures, or paint the bedroom.
I didn’t fuss about much with trying to time the market, or picking an area that was going to get massive capital growth. I just bought something in a decent area that met some minimum requirements, and I bought something I could afford to pay for even if interest rates went up quite a bit (which they did). Importantly, I bought something. The thing with property is that getting in early is best, but more on that later.
Mostly though, I just kept at it. The automated savings thing worked well to get me my deposit. After that, I dumped my entire salary into the mortgage (I used an equity offset type loan) so that I’d pay it off as fast as possible. Having that dirty big negative number on your ATM receipt is a big motivator to not spend a whole lot.
I was late to the party. I could have done this a lot earlier if I’d made some smarter decisions when I was younger. On the plus side, better to have done this now than later. Many people never manage it. I guess the tip here is to start now, if you haven’t already.
I sold my house after moving in with my girlfriend. I got more for it than I paid, including maintenance and interest, which proves that property is an investment. I would have paid it off in about another year, so selling now was more of a shortcut to being debt free.
My girlfriend owns her house, too. She paid hers off by 31, and her story is more remarkable than mine. I’m going to try to get her to write about it, too.
Your choice of partner can make a big difference. When I was younger, I had a couple of girlfriends who liked to spend up big on all kinds of random stuff. We didn’t get on so well. Mostly, though, I’ve been attracted to women who have a financial mindset similar to my own.
That’s the short version of how I became debt free by 33. There’s a lot I haven’t mentioned here. There were a lot of mis-steps along the way, some close calls, and some lucky breaks. This post doesn’t really tell the whole story, so I’m going to write a series of posts to fill in the backstory.