Living a debt-free life is part of the millennial dream. Unfortunately, many of us are bogged down by the money we owe to various financial institutions, and it feels like there’s no end in sight.
In my opinion, debt holds you back from living the life you really want to be living. If you didn’t need to put that $100-$1,000+ payment towards debt every month, what would you do with it? Would you travel? Save for a home? Take night classes for an advanced degree? Build your retirement account? Diversify your portfolio? I can think of a million things I would rather do with my money than pay off debt. But once you have it, the only thing you can do is pay it off.
Having debt should not be something we consider normal. Do you really want to continue owing money on things like student loans and an abused credit card well into your thirties? I sure don’t.
Here are five ways to be debt-free by your mid-twenties:
1. Stop accumulating more debt.
First things first, in order to get rid of your debt, you need to stop adding to it. When it comes to paying down your debt, it can feel like you’re taking one step forward only to realize you’ve moved two steps backwards by next month.
In order to do this, you need to live below your means; and as far below them as you possibly can without driving yourself crazy. If your housing is currently costing you 40 percent of your income, try lowering it to 30 or even 20 percent. You have options, but it is up to you to determine which of those options fits in best with your financial situation.
Another thing we often forget is that just because someone says you can afford something, doesn’t mean that you should afford something. Our culture has lead us to think that bigger and more expensive is better. Change your mindset to something more along the lines of “I have what I need.”
2. Be aggressive.
Minimum payments are the least amount of money you can pay back per month, but they come at a high rate of interest, meaning that over time, you will be paying back anywhere between two and 20 times what you borrowed to begin with. That sucks.
At the very least, make the effort to pay more than the minimum payment. The more you can throw at your balance, the better off you will be. It can be very frustrating at times, but the more you pay today, the less you have to pay tomorrow (or five years from now).
3. Lower your fixed expenses as much as possible.
This is a tip that we often discuss here at GenTwenty, and for good reason. Fixed expenses are recurring expenses you pay for each month. Think car insurance, rent, your cell phone bill, etc.
The reason you want to keep these low as possible is because they aren’t easily changed and you have to pay them every single month. You can stop buying clothes for a month, switch from eating out to packing lunch or making coffee at home, but you aren’t able to go to your landlord and say, “Hey I’m a little short on rent this month, but I was out of town for a few days so I shouldn’t have to pay rent for those days.” You have to pay these expenses regardless of what else is happening in your life, or face the consequences.
Keeping them low frees up more of your paycheck for other things like debt repayment — and one day, what you actually want to be spending your money on.
4. Allow yourself to splurge strategically.
For most of us, in the midst of paying off debt, it’s silly to go all in and not allow yourself to spend money on anything that makes you happy. Throwing every dollar you have at a mountain of a balance is an admirable thing to do, but it is often not a realistic thing to do. Despite having debt, you still
get need to live a little.
At GenTwenty, we are fans of the strategic splurge. Spend your hard-earned money on things and experiences that are an investment in yourself. Love hiking like Dana does? Save up and buy the equipment you need to indulge in your hobby. Remember: your mental health is just as important as your financial health.
5. Finally, make a plan and re-visit it every single time you make a payment.
I challenge you to sit down today and make a list of everywhere you owe money to. Then, reorder the list from highest interest rate to lowest interest rate. Add it up. If you continue to make minimum payments, it will hardly seem as if you’re making any progress. Some accounts, like student loans, show a breakdown of how much your payment goes towards the principal balance and how much goes towards interest. In many cases, the interest payment is higher than the principal balance.
Take a look at your budget. See if it’s possible for you to double your payments. Is there anywhere you can cut back to put more towards your debt? You might not be able to make huge payments every month, but every little bit helps. Reevaluate your plan every time you make a payment. This will help keep on on track and to adjust in case you can make a larger or smaller payment.
Life without debt is a millennial dream, and it’s certainly an achievable one. Focus on eliminating your debt aggressively while avoiding accumulating more, paired with the occasional strategic splurge and you’ll be on your way to being debt-free by your mid-twenties.