There are many ways to achieve success in personal finance, I don’t think there’s just one strategy or idea. Of course there are core principles like pay yourself first, automate your money, maintain a consumer debt free lifestyle, and invest 20 percent or more, that I believe are critical. Of those critical pieces is to maintain a consumer debt free lifestyle–the focus of this post.
What is Consumer Debt?
Before we get too much into how to maintain a consumer debt free lifestyle, it’s important to define consumer debt. Consumer debt typically pertains to debt like credit cards, personal loans, car loans, etc. For example, an individual $10,000 in credit card debt would be considered to have $10,000 of consumer debt.
A few other examples:
- $500 per month car payments for 60 months
- $25,000 personal loan
- Balance of $2,800 in store credit
Consumer Debt vs Debt
Despite what you may have heard, there are different types of debt. And depending on who you ask, not all debt is bad. I’m in the camp that consumer debt is something to be avoided at all costs but other debt can actually be good.
Consumer debt is a type of debt that pays you nothing to keep. In fact, it’s the total opposite–you are paying to keep the debt in the form of interest payments and the debt repayment itself. Consumer debt offers no benefit other than taking the shortcut and buying something before you can afford it, which of course comes with a very high future price tag.
On the other hand, there is debt that can actually make you money. For example, debt carried on real estate or something else that you rent out. A property purchased for $100,000 with the following numbers for example:
- Debt service, taxes, insurance: $650
- Money set aside for repairs, vacancies, capital expenditures, etc: $200
- Monthly rent: $1,000
- Money left over (cashflow): $150
In this example, there is debt being carried, but the rent more than covers the debt service along with items like repairs, vacancies, etc. While the person owning this property is in debt, it’s debt that is paying her on a monthly basis. Which I would argue is good debt.
Why Is It So Important to Maintain a Consumer Debt Free Lifestyle?
Consumer debt has the potential to be one of the largest expenses of the month. Much like good things can snowball, consumer debt also has a way of snowballing. Here’s how it happens.
One month you have one credit card open with a $8,500 balance. Six months later that card is maxed out so another card is opened. Seven months after that, the first card is still maxed out and the second card has a balance of $4,700. A year after that, two cards are maxed out and a third is opened.
Minimum payments are made on all the cards, taking out a large chunk of monthly income while making little to no progress on reducing the principal. It’s an endless cycle of earn–pay–earn–pay. All while making little progress in both the debt payoff and future wealth building. Consumer debt is a trap to be avoided at all costs.
How to Maintain a Consumer Debt Free Lifestyle
The remainder of this post will be dedicated to how to maintain a consumer debt free lifestyle. The following strategies have all worked for me as well as for many people I’ve spoken to. They are tried and true principles that have years of success behind them.
Number 1: Spend Less Than You Earn
One of the easiest ways to maintain a consumer debt free lifestyle is to avoid getting into consumer debt in the first place. And the easiest way to avoid it in the first place is to spend less than you earn. This is pretty straightforward.
Someone making $5,000 per month needs to spend less than $5,000 per month. “Spending” includes paying yourself first, all your bills, food, entertainment, incidentals, etc. The person spending $4,800 per month is on track to avoid consumer debt. The individual spending $5,100 per month is on track to fall into consumer debt.
The bigger the gap created between spending and income, the more likely it is to maintain a consumer debt free lifestyle.
Number 2: Keep an Emergency Fund
Over the years I’ve learned that one thing to expect is the unexpected. We don’t know how or when it’s going to happen, but there is going to be an unexpected. The unexpected can be something as small as a flat tire or something bigger like a toilet that overflows all over the flooring
Since we know that the unexpected is going to occur, the one thing we can control is to put plans in place for when it does. That plan is an emergency fund, which I go into great detail on in these posts.
- How Much of an Emergency Fund Should You Really Have?
- Why the Pandemic Prompted Me to Increase My Emergency Fund
- The Broken Down Car and the Emergency Fund
An emergency fund turns the unexpected from a potential financial crisis to an inconvenience. This means the money is there to cover the expense and money doesn’t have to be put on the credit card to pay for the emergency or the regular monthly expenses.
Oftentimes consumer debt arises because there was some emergency within the last year. The emergency derails the finances and monthly expenses become difficult to cover, which leads to consumer debt. The emergency fund prevents this chain from occurring.
Number 3: Avoid Car Payments
As soon as someone signs the papers for a car loan, they are in consumer debt. If the goal is to maintain a consumer debt free lifestyle, car payments are something to avoid. Many people I talk to understand that credit cards, persona loans, etc. are forms of consumer debt. But the connection to car loans isn’t always made.
Cars depreciate quickly and cost money every month. When you add a car payment on top of fuel costs, insurance, maintenance, etc., it becomes even more expensive to own a car. The more expenses we have every month, the greater chance of falling into consumer debt. Conversely, the more expenses we can eliminate like a car payment, the more likely it is that a consumer debt free lifestyle is maintained.
For more on the expenses of owning a car, see chapter 11 of my book Cash Uncomplicated.
Number 4: Pay Off Credit Card Immediately
Credit cards used responsibly can be a good thing. There’s the ability to earn travel rewards, cash back, hotel stays, etc. There are a lot of incentives offered by the credit card companies.
Of course the incentives are offered because the credit card companies are making a bet that a large percentage of people will be unable to pay off their balance in full. Which means consumer debt and the beginning of a cycle that can be very difficult to get out of.
If you’re someone who uses a credit card, the best way to maintain a consumer debt free lifestyle is to pay off the card immediately. By immediately, I mean right when the bill is due. Pay it off in full and rest easy knowing you are taking a huge step to being consumer debt free.
Number 5: Be a Value-Based Spender
Debt prevention is key. And there’s no better way to maintain a debt free lifestyle than avoiding debt in the first place. Even better, value-based spending allows you to not only avoid debt, but to also do the things you want to do. There’s no deprivation or feelings of missing out.
With value-based spending, you are only spending on necessities and the things/experiences you really want. It requires a deep assessment of your values, which provides tremendous clarity to make spending decisions.
So often when the experts talk about staying out of debt, they talk about cutting things out. Value-based spending reverse engineers the process–and instead of cutting things out, it focuses on putting things in and naturally leaving out the unimportant and insignificant.
Number 6: Track Expenses
Number six on the list of ways to maintain a consumer debt free lifestyle is to track expenses. The reason to track expenses is not to put people through a torturous exercise of auditing their personal finances. Rather, it’s to create clarity by understanding where the money is going.
Far too often there is little understanding where the money is going. We all live busy lives and it’s easy to lose track of money. Most people won’t remember the trial gym membership that turned into a full membership six months ago. Or the unused subscriptions from three years ago.
It’s human nature to forget, and that’s where tracking comes in. Tracking money consistently will show anyone exactly where their money is going. Seeing where it is going in writing (digitally or printout) is a very powerful exercise that helps shape behavior changes.
For example, imagine two scenarios. The first is just paying the credit card bill– and as long as it seems right, not thinking twice about it. The second scenario is going through each expense and deciding whether it’s wanted or needed.
Seeing a $40 charge for an unused gym membership in writing is obviously wasteful and will prompt action to eliminate that cost. Same as seeing three unused subscriptions totaling $50. There is discomfort in seeing these items in writing, and that discomfort will prompt action to eliminate the unnecessary expenses.
Track manually or use an app like Mint or the one from YNAB.
Number 7: Maintain a Budget
Last on the list of ways to maintain a consumer debt free lifestyle is to maintain a budget. I know, the B word. Budgets really are freeing though and they can look different ways. They don’t have to be line-by-line itemizations of food, entertainment, investments, etc.
For example, paying yourself first is a method of budgeting. Paying yourself first means the first money that comes out every month goes towards savings and investments–a way to guarantee those buckets are filled. Then the remainder of the money is used for expenses like the mortgage/rent, food, entertainment, etc.
Here’s a quick example of how it works using someone who makes $5,000 per month. If the goal is to invest 20 percent and save 10 percent–this is the breakdown:
- Investments: $1,000
- Savings: $500
- Remainder for living expenses: $3,500
The budget becomes $3,500 per month. As long as monthly expenses don’t exceed this amount, it’s all good.
There are many other ways to budget, including line by line, an envelope system, etc. Pick what works for you and stick to it.
Conclusion
It’s not hard to maintain a consumer debt free lifestyle, but it’s also not easy. It takes intentionality and consistent effort. After some time, the results will really begin to compound and consumer debt will be a thing of the past.
Applying the principles from this post will greatly help. Spend less than you earn, keep an emergency fund, avoid car payments, pay off credit card immediately, be a value-based spender, track expenses, and maintain a budget.
How do you maintain a consumer debt free lifestyle?
