There was a time when people got paid on Friday and went to the bank on their lunch hour. They cashed their paychecks and deposited money into their bank accounts. Stores took checks from customers they knew and everyone else paid cash with real money that they carried around in a wallet or purse.
Find out now: How much should I save for retirement?
There were three basic types of credit most people had access to; mortgages, car loans and retail lay-a-way plans. If you wanted a new coat, you put money aside and when you had enough saved you went to the store and purchased the coat. A common phrase heard in households around the country was “it will have to wait until next week” in answer to the question of can we buy…?
Nostalgia aside, as recently as the 1970’s personal bankruptcies were extremely rare in the United States. What changed was the credit revolution. Thanks to newer, faster, computers and the digitization of increasing amounts of financial records, evaluating vast numbers of credit applications became easier. So we’ve seen a boon of credit cards being issued.
Related Article: How to Decide Which Debt to Pay Off First
Don’t Say No
Advertising campaigns popped up everywhere all with the same theme why wait when you can charge it. Buy now, pay later. The idea was revolutionary not just for the borrower who got to spend money they didn’t have but for the banks that issued the cards that were suddenly able to make huge sums of money without having to do very much to earn it.
The brief history lesson above is not intended to be complete but meant to explain those too young to have known a time before we lived on credit and remind those old enough to remember who choose not to, that things were not always as they are now. People lived on what they earned and no more. The point being that it is very possible to live a full and happy life debt free. It’s been done before.
Related Article: 4 Sneaky Ways Retailers Trick You Into Spending More
How to Become Debt Free
Getting out of debt is not complicated but also not easy and it requires commitment. The not complicated part amounts to simply stop spending other people’s money. Limit credit to the barest of minimums, a mortgage, a reasonable car loan (it’s better to pay cash and buy used) and possibly student debt. That’s it! The day you stop using credit cards and personal loans to finance your life is the day you start down the road to financial independence.
Now, take a deep breath because it is not going to be easy but you can do it. When it comes to personal finance, I use a rule of inverse proportionality to gauge things that goes like this. The more complicated something is the easier it is to do and the less complicated something is the harder it is to do. Credit cards are complicated. Don’t believe me- take a look at the fine print on your application and user agreement. But credit cards are easy to use and abuse. Not using credit cards any more is simple, no user agreements, no terms, no interest to calculate and carry forward but it is hard to just say no I can’t afford to do that right now.
Wondering how to live debt free? To pay off old debt, get yourself on a budget. Then, decide whether you’re going to prioritize the debts with the highest interest rates or start with your smallest debts first. You may also want to work with a non-profit credit counseling organization that can help you work out a debt management plan. Once you break your debt into manageable chunks and put yourself on a timeline to debt-free living you’ll feel much better. Living debt free means less stress, a higher credit score and more money to spend on things you want, not on interest payments.
How to Stay Debt Free
Creditors are like old lovers that you broke up with when you realized they were bad for you, they won’t take a hint and leave you alone. Within months of canceling or no longer using your credit cards and lines of credit the companies that have made great gobs of money by feeding off you will start calling and writing.
They’ll want to know if they did something wrong and what can they do to make it right. They’ll offer to lower their rates, remove annual fees, give you free cash advances (at higher interest rates), tell you that you lost weight and your hair is growing back. Ok I did lose weight but my hair is not coming back. The point is they want back the good thing they had which is why you have to stay strong and remember the relationship was good for them and not you.
Related Article: 5 Money Myths You Can’t Afford to Buy Into
Over time you will grow accustomed to the habit of paying for what you want with what you have. The idea of actually owning your possessions may take a little while to sink in but once it does and you realize that the really great jacket you’re wearing cost you exactly what the price tag said and not tens or hundreds of dollars more in hidden interest charges you’ll start to feel better.
As more time passes and your monthly credit bills start to drop off, your step will get a little lighter and your bank account a little heavier because all the interest you were giving away and not getting anything in return for is staying in your pocket and your bank account. Then you’ll smile and wonder why you didn’t do this sooner.
Photo Credit: flickr, © iStock/hidesy, © iStock/Starflamedia