What is Debt Free Living? (2024)

4 Min Read | Updated December 15, 2023

Originally Published:March 18, 2020

Being debt-free in America has become more difficult in recent years with the everchanging economy. In the second quarter of 2023, the total U.S. household debt reached a record high of $17.06 Trillion, according to the Federal Reserve.¹ This amount of debt was primarily led by credit card balances, with consumer loans, auto loans, student loans, and mortgage balances following suit.

Depending on your definition, living debt-free in modern society has its own major challenges. Just try buying a home, leasing a car, or signing up for a cell phone plan without acredit score—your (metaphorical) certificate of lifetime achievement. It’s virtually impossible to do any of these things without acquiring debt.

Living debt-free can be a challenge, and it may not offer the benefits that you were looking for. Instead of focusing on going 100% debt-free, taking steps to reduce debt, or to ensure that you’re using debt as the helpful tool that it can be, could be a better goal. With this approach, you can still access certain types of financing, or take out a mortgage, but instead of focusing on eliminating debt altogether, you can instead focus on ensuring that you use debt wisely; to make investments, or use it to grow your net worth.

In this article, we’ll dive into what debt-free living is, as well as some of the pros and cons. We’ll also uncover steps that you can take to reduce debt.

The definition of “debt-free” isn’t set in stone. One school of thought sees living debt-free in absolute terms: zero debt of any kind. A looser approach keeps your mortgage out of the equation since that’s an investment in an asset (your house) that should grow in value over time.

Some people use a more strict definition of living debt-free, which includes avoiding credit cards altogether, while others see credit cards as necessary as long as bills are paid on time and in full every month.

When it comes to borrowing money, not all debts are created equal. Good debt is typically seen as a smart investment in your financial future. A student loan can help you get an education and increase your earnings potential. A mortgage could be your opportunity to home ownership. Credit cards can smooth out the highs and lows in the cash you have available.

On the other hand, bad debt typically refers to high-interest loans used to purchase depreciating assets like luxury items or cars.² These types of debts cost you more in the long run with interest payments and don't have any potential for long-term financial gains.

Ultimately, the type of debt you take on should be based on your financial situation, including your current income and ability to repay the debt.

Pros of Debt-Free Living

Like any other lifestyle choice, living debt-free comes with its own set of pros and cons. Here is a list of some of the benefits and challenges of living debt-free:

Pros of Debt-Free Living

• Financial Stability: Being free from debt can help give you financial freedom and stability. You won’t have to worry about paying interest, late fees, and penalties, which could affect your finances.
• Less Financial Stress: Debt-related stress can affect your mental and physical health. Living debt-free can give you one less thing to worry about.

Cons of Debt-Free Living

• Strict Budgeting: Living debt-free may require strict budgeting and discipline, which could mean delaying gratification or postponing significant purchases.
• Strain on Emergency Funds: Not having debt can make it easier to manage your money until an unexpected expense comes in. Limiting access to a credit card or loan may put more stress on your emergency savings and can put you further away from your financial goals.
• Quality of Life: The obligation to pay debt in a timely and responsible fashion might keep you tied to a job that you don’t like or otherwise limit your lifestyle choices. The penalties for falling behind can be significant.
• Limited Credit Options: Your payment history accounts for 35% of your FICO^® Score.³ So, if you don’t have any open credit accounts that you’re actively making on-time payments on, it may be hard to acquire new credit in the future.

Like any other lifestyle choice, living debt-free comes with its own set of pros and cons. Here is a list of some of the benefits and challenges of living debt-free:

Pros of Debt-Free Living

• Financial Stability: Being free from debt can help give you financial freedom and stability. You won’t have to worry about paying interest, late fees, and penalties, which could affect your finances.
• Less Financial Stress: Debt-related stress can affect your mental and physical health. Living debt-free can give you one less thing to worry about.

Cons of Debt-Free Living

• Strict Budgeting: Living debt-free may require strict budgeting and discipline, which could mean delaying gratification or postponing significant purchases.
• Strain on Emergency Funds: Not having debt can make it easier to manage your money until an unexpected expense comes in. Limiting access to a credit card or loan may put more stress on your emergency savings and can put you further away from your financial goals.
• Quality of Life: The obligation to pay debt in a timely and responsible fashion might keep you tied to a job that you don’t like or otherwise limit your lifestyle choices. The penalties for falling behind can be significant.
• Limited Credit Options: Your payment history accounts for 35% of your FICO^® Score.³ So, if you don’t have any open credit accounts that you’re actively making on-time payments on, it may be hard to acquire new credit in the future.

As we touched on above, for many people, reducing debt may be a better goal, and a viable alternative to going debt-free. Reducing debt involves many of the same benefits as going debt-free, but with fewer restrictions.

Each step toward reducing debt may look big, but the payoff can be just as big, including less stress, more cash, and greater financial independence. The trick is to break each step down into smaller, meaningful action items tailored to your situation to build success along the way. You should also be realistic about the time frame you set because it won’t happen overnight. You could even take a trial-and-error approach if the going gets tough.

Below are a few steps that you can take to reduce debt.

Make a plan. Planning to reduce debt could include anything from taking a second job, downsizing your home, and dipping into savings. But any plan should have a few things in common: specific objectives, available resources, action items, and timelines—all the standard but too often ignored elements of successful planning. For more insight into the planning portion, see: "7 Budgeting Tips to Help You Save More Money."

Get rid of existing debt. TThere are several ways to tackle your existing debt, including:

• Debt Consolidation: The process of combining multiple debts into one manageable payment, typically with a lower interest rate.
• Balance Transfer: The process of moving an existing credit card balance to another card with a lower interest rate to save money on interest charges.
• Debt Avalanche: Involves paying your highest-interest debt first for the most significant savings.
• Debt Snowball: Involves paying your smallest, easiest debts first for psychological motivation.

Livebelow your means.Reducing debt may include a simpler lifestyle ranging from eating out less to using public transportation or canceling subscriptions. For more ideas on how to save money by living below your means, see “How to Stop Spending Money and Start Saving.”

Develop good money habits.Some good money habits to start with include auto-transferring money into your savings, planning your purchases, paying bills on time with autopay, and learning how to invest. Practicing these things will help you reduce debt without sacrificing your quality of life.

Maintain discipline. As financial stress recedes, it can be tempting to revert to old money habits. You know yourself. Maybe you’ll need progress rewards, the buddy system to hold you accountable, or another mechanism to keep you on track. Factor these into your plan. And consider it part of your discipline to revisit and revise your plan on a regular basis.