In your 20s, you’re transitioning from dependency to independence. Balancing your expenses such as rent, utility bills, and food can be challenging. As such, many young professionals end up accruing large debts that can afflict them for many years.
However, there is a silver lining. It’s possible to master a debt-free life. In this post, we’ll look at why living a debt-free life is worth it and how you can enjoy a debt-free life. Without further ado, let’s dive right in.
Living debt-free relates mostly to consumer debt - credit taken to finance a lifestyle, pay for recurring expenses and generally that which doesn’t contribute to the growth of your net worth.
Taking a loan to start or expand a business, purchase land or a house or invest in something that appreciates in value over time and have a possibility of repaying the loan is generally considered good debt and in fact encouraged as we discussed in How to Build Wealth Using Other People's Money.
Living debt-free is one of the best financial moves you can make. Here are a few reasons why.
When you pay off your debts, you’ll sleep better at night, feel less anxious during the day, and generally have more peace of mind.
Besides, you'll use your money more freely and without worry, knowing that your debts are taken care of.
Debt takes away a piece of your financial control. Think of it this way, if you earn Ksh 100,000 net per month and you get to keep all of it, you have full control of what to do with it.
But if every month you have to pay off Ksh 20,000 to settle a debt you took for a Dubai vacay, you can only control Ksh 80,000 of your money. When you have more control of your money, it’s easier to meet your financial goals.
The loss of control is in relation to the lost income that is financing consumer debt rather than building your net worth. With a lower take home pay then you are limited in what you can do - especially when you took out a loan to pay for expenses or depreciating assets.
Also read: 10 Long-term Financial Goals to Start Today
Paying off your debt allows you to do the things you love without worrying. You can dine out or go for vacation unencumbered by debt.
Consider this, you’re currently paying Ksh 15,000 in consumer debt, that’s Ksh 180,000 per year that you could spend on a big purchase, a trip down the Coast or to further your education.
Also read: The 7 Stages of Financial Freedom
This is a no-brainer. If you have fewer debt payments each month, you’ll have more money to invest. And if you have more money to invest, then you can build wealth faster.
Let’s say you spend Ksh8,000 per month on consumer debt repayment. That’s Ksh96,000 annually that you don’t get to invest.
Note that if you have entered into debt for the purposes of building wealth, then depending on the magnitude of the returns vis-a-vis the cost of the loan, you could have made a good choice going the credit route.
Whenever you get into debt, you’re assuming you’ll be able to pay it back in future. But the future is always uncertain.
What if you lose your job or get sick and have to pay a lot of unplanned medical bills? Debt can only make it worse. But if you’re debt-free and such uncertainties strike, it becomes easier to make ends meet.
If you are in debt, it is possible to mitigate against this by taking out health, property and personal accident covers that ensure your regular and emergency expenses are taken care of in the event of a loss of income or emergency requiring an instant cash intervention.
Then the burden of repaying the loan may not be as high as when you are not covered.
So, how can you enjoy a debt-free life in your 20s?
Owing other people money can be a pain in the neck. The good thing is that you can live a debt-free life. Here is how:
Creating a budget is a good place to start your debt-free life. A budget will help you track your spending and make sure that you are not spending more than you can afford.
So, how do you create a budget? There's no one-size-fits-all answer. It depends on individual circumstances. However, here are some tips to help you get started.
Start by calculating your net income and expenses to know where your money is going. You can use a budgeting app or spreadsheet to keep track of your spending, or simply write it down in a notebook.
You should then cut out unnecessary expenses to ensure you’re spending within your means. For instance, do you really need that premium TV subscription? Could you pack lunch to work instead of eating out?
Next, set aside money to cover your essential expenses, such as rent, food, and transportation. Once you have a cushion for these necessary costs, allocate money towards your other financial goals, such as planning for retirement.
Finally, remember to review your budget regularly and make adjustments as needed. This will ensure you're staying on track and making progress towards your financial goals. All in all, be realistic when creating a budget so that you can stick to it.
More learning: The Ultimate Personal Budgeting Guide
When you have a large savings account, you have a buffer between you and debt. This buffer can help you avoid getting into debt. And even if you do get into debt, it can help you pay it effortlessly.
There are a few things you can do to build up your savings account. First, automate your savings. This will help you make headway on your savings goals even when you don't feel like it.
Second, try to keep your living expenses low so that you have more money to put into savings. Finally, invest your savings wisely by avoiding common investment mistakes.
When you spend less than you earn, you can start saving money for the future and live a debt-free life. It can be tough, but it's worth it in the long run. Below is how to ensure you’re living within your means.
First, make a budget and stick to it. As you already know, a budget will help you know exactly how much you have to spend. Don’t exceed that amount.
Second, save up for big purchases instead of getting them on credit. And third, avoid impulse buying.
More learning: 10 Warning Signs You’re Living Beyond Your Means
When you have multiple sources of income, you can enjoy a debt-free life. Ever heard of the phrase “wealth begets wealth”? Essentially, more money and income will attract more money.
As such, when you increase your sources of income, you’ll have money to afford the lifestyle you desire and invest without necessarily relying on debt - and when you need to borrow, you are sure your multiple income streams will guarantee you can comfortably pay your debts.
You can increase your sources of income by:
Even though Increasing your sources of income can help you get out of debt and achieve financial freedom, it takes time and effort to make this happen. So don't give up if it takes a while to see results. Just keep working. You’ll eventually get there.
More learning: 8 Ideas to Create Multiple Sources of Income
An emergency fund is an important part of maintaining a debt-free life. Without one, unexpected expenses can quickly become overwhelming and lead to debt.
But if you have a cushion of savings to cover unexpected costs, you can avoid falling into debt because of an emergency.
You should aim to have at least 3-6 months of living expenses in your emergency fund. This will ensure you have enough to cover unexpected expenses while still being able to cover your regular bills.
Once you have a solid emergency fund in place, focus on other financial goals, like paying off debt or investing for retirement.
Living a debt-free life is a smart decision that everyone should consider. It gives you the freedom to live your life without financial troubles holding you back. So what are you waiting for? Pay off your debts and live a debt-free life by using these tips!