Most people don’t plan on falling into debt. But somehow, 3 in 5 Americans carry a revolving credit card balance that averages $5,875. Even worse, 23% of folks report that they’re slipping deeper into the hole every month. Yikes!
While we may not intend to hurt our future selves, a few bad spending habits can derail your finances. On the other hand, adopting a few of the money habits commonly held by debt-free people can help you protect your finances and build wealth for the future.
So what can we learn from the less than 25% of Americans who are debt-free? What are they doing differently, and what behaviors can we mimic to better ourselves? We’ve talked to a ton of debt-free folks, and here are the defining habits they live by…
1. Track their spending
In today’s consumer-driven world, it’s very easy to underestimate what we spend each month. In fact, most Americans underestimate their monthly subscription spending by over $100 per month! And that’s just one small aspect of our monthly finances.
If you don’t know how much money you’re actually spending, it’s extremely difficult to plan ahead and save. You could be hemorrhaging money month to month without even noticing it, digging yourself into a serious financial hole.
Debt-free people stay on top of their expenses and track where every dollar goes. By doing this it helps illuminate their spending patterns, which reveals areas within their finances they can afford to make cuts and save more.
It’s easy to rationalize spending $10 here and there throughout the week on treats, or on subscriptions. But when you see the monthly totals in black and white, it might encourage you to make some changes! Perhaps skip out on a few impulse buys, or say no to conveniences that you don’t really need. For example, spending $20 on takeout one night may not seem like a big deal. But when you track your spending and realize you’ve blown $400 on takeout in a single month, it’s easy to see that you need to reel it in!
2. Simple budgeting
Another trait commonly held by debt-free people is forming simple budgeting habits. This means making a plan for their money before it is spent, not playing catch-up afterward.
For example, have you ever felt like you were on track to save a good amount one month, only to get slammed by an event you forgot about? Like a recurring annual bill or Summer trip you forgot to consider. If there’s no plan in place or money saved, you’ll likely have to take on debt to pay for this stuff.
Budgeting helps cut back on those expensive surprises. It helps people save and plan for irregular bills, and afford things without taking on debt. Plus, budgeting comes with a ton of other surprising benefits most people overlook. It gives you the power to spend more on the things you value, and less on the things you don’t. Not to mention, it can help you enjoy more peace of mind in your everyday life.
If you’re new to budgeting, try starting with a basic 50/30/20 budget. This means allotting 50% of your income for Needs, 30% for Wants, and setting aside 20% for long-term Savings.
3. Spending less than they make
This next habit may be self-explanatory, but it’s important to point out nonetheless. If you spend more than what you make, you’re bound to end up in debt eventually. It’s basic math.
So to remain debt-free, it’s important to live below your means and only spend money what you actually have in your possession! No counting your chickens before they hatch! By spending less than you make each year, you can save and invest the difference. That’s how you grow wealth.
If you find that money is flowing out of your bank account faster than you can make it, it’s time to work towards cutting your expenses and raising your income. These frugal living tips can help you do just that, by cutting back monthly spending in various areas.
While cutting expenses is a good first step, those changes will be amplified when you combine them with an increase in income. To widen the gap between your income and spending, consider asking for a raise or starting a side hustle for extra cash.
4. Keeping emergency funds
One of the best safeguards against taking on debt is building an emergency fund. An emergency fund is easily accessible savings that you set aside specifically for surprise expenses you cannot plan for.
For example, if your car unexpectedly breaks down and you do not have savings, you may be forced to pay for the repair with a credit card that you can’t immediately pay off. But, with an emergency fund, you can simply pay in cash and be done with it. Debt-free folks understand that anything put on a credit card that can’t be paid off when the statement comes ends up costing them more money because of massive interest rates. So keeping emergency cash on hand at all times protects you from paying higher prices in the worst possible times.
Ideally, an emergency should have 3-6 months worth of expenses saved in it. However, a great place to start is to work towards saving just $2,467. Economists have found this exact amount is enough to cover the most common emergencies. Once you’ve saved this amount, you can work towards fully fleshing out a fully funded emergency fund over the coming months.
5. Mindful spending
Debt-free folks have great spending habits, carefully thinking about all purchases before making them. Mindful spending is taking an intentional approach to ensure your spending aligns with your values. This helps you to spend more on things that make you happy, and less on the fluff that doesn’t truly improve your life!
For example, if you’re a coffee fanatic, mindful spending might look like purposefully budgeting $7 a few times a week to grab a delicious pour-over coffee on the way to work. To afford this, cuts might be made to other areas, like bringing lunch to work more or cooking meals at home. Or, if you value vacations and travel, maybe you work hard to cut your transportation budget by eliminating a car or walking and biking more. Saving money in one area helps fund another!
All in all, mindful spending is awesome, because it puts you in deeper alignment with your values. And those frugal values can save you a TON of money and help build massive wealth over time.
One of my favorite tips for spending mindfully is to create a 24-hour wishlist. Every time you add something to an online shopping cart, don’t check out right away. Instead, wait a full day before making that purchase. Oftentimes that item you thought you had to have doesn’t seem as necessary as it did the day before!
6. Living in moderation
One of the most financially impactful habits of debt-free folks is consistently living within their means, and avoiding lifestyle creep. These people look at their big three expenses- housing, transportation, and food, and constantly look for ways to reduce their costs.
With the rising price of groceries, cars, and housing, it’s easy to see why some folks struggle to live within their means. According to a study from the Chamber of Commerce, 27.4% of homeowners spend more than 30% of their income on housing, making them “house poor.” Meanwhile, the average monthly car payment has reached $726 for new cars, and $533 for used cars. With such little margin, it’s easy to accidentally slip into debt. That’s why it’s important to start chiseling down those big expenses.
Sure, saving money by skipping a treat here and there can certainly add up. However, cutting back on the larger expenses has a larger impact on savings.
For example, if you begin house hacking, cutting your housing expenses to just $500 each month, it’s easier to treat yourself occasionally without having to worry about hurting yourself financially. Or, if you’ve ditched your car, saving an estimated $9,282 each year, you’ll probably feel better about taking that trip you’ve always wanted to go on.
As you can see, lowering big expenses can give you major peace of mind. It frees up your wallet to spend on the little luxuries you might value more.
Ways to Save Money on Housing:
So you want to lower your housing expenses, but how? Here are a few ideas for how to save money on housing:
- Start House Hacking- This is when you rent out a room or portion of your home to another person, essentially lowering your monthly mortgage payment.
- Live with roommates- You’ll be able to split your rent instead of bearing the full cost. Plus, you might even come to enjoy the extra company!
- Negotiate Your Rent- Renters have more power than you might think. Negotiate for lower rent or additional perks
- Downsize- If you realize that you’re not utilizing all of your home’s space, why not consider downsizing to a smaller and cheaper apartment or home?
- Move farther from the city center- Homes and apartments further away from city centers tend to come with a lower price point. This can work particularly well for remote workers.
Ways to Save Money on Transportation:
There are plenty of ways to cut back on car costs. Here are just a few frugal transportation habits to implement and help with that debt-free lifestyle.
- Walk or Bike More- Swapping a 10-mile car commute for a bike commute can save you nearly $1,000 annually!
- Become a one-car family- If you can eliminate one car from your home, you’ll save over $9,000 each year!
- Stop speeding- Speeding is not only dangerous, it’s less efficient! Driving the speed limit will allow you to spend less of your precious cash on fuel (and speeding tickets!)
- Carpool more often- The less you use your car, the lower your maintenance and fuel costs will be.
- Buy a cheaper car- You don’t need to spend over $20,000 to get a safe and reliable vehicle. Be sure to check out Matt & Joel’s favorite cars for frugal folks!
Ways to Save Money on Food:
While the price of food has jumped significantly in recent years, increasing 11% between 2021 and 2022, you can still fight back against rising prices. Here are a few tips to slash your monthly food budget.
- Try a pantry challenge- Every few weeks, try and use up those leftover ingredients in your pantry. Recipe site Supercook can help you save money and prevent food waste.
- Take advantage of coupons- Grocery stores have gotten into the app game! They’re loaded with coupons that you can digitally “clip”!
- Switch to a budget grocery store- Where you shop has a huge effect on your spending. Switching to a budget grocer like Trader Joe’s or Aldi can save you around 33% on food.
- Purchase store brand items- How much better could the name brand really be? Switching to store brands can save you around 40% on groceries!
- Eat out less often- The average American spends $2,375 on takeout every year. Imagine what you could do with the savings if you cut that spending in half!
7. Skip BNPL (Buy Now Pay Later)
While “buy now pay later” isn’t necessarily always considered debt, it is. It’s debt in disguise at its core! When you purchase an item before you have the money to buy it, you’re essentially robbing your future self of those funds.
When we make BNPL purchases, we often think that the item or service will make us happier, but as time goes on that may not always be the case. Imagine yourself 3 or 4 months down the line still paying off that Dyson Airwrap you’re too tired in the morning to use. Or still paying off that vacation you took six months ago. Trust me, your future self will likely regret BNPL purchases.
That’s why debt-free folks steer clear of all lending programs, even if they don’t charge interest. Instead, they save up the money they need for those splurges ahead of time.
8. Delaying gratification
If I offered you a brand new Tesla right now, or $500,000 but you have to wait 25 years, which would you take? Sad to say, most people would take the Tesla! It’s because human nature strongly tempts us to want everything right now, even if there’s something surely more valuable waiting for us down the line.
Delayed gratification is the practice of staving off those tempting feelings, and waiting for the much better thing to come along later. Debt-free people know that by keeping their emotions in check, they can save up and afford anything they want later in life. Future you will be thankful!
9. Consume the right content
There’s a fun, somewhat new HTM-approved trend going around right now called “de-influencing.” In a world with TikTok Shop and rampant Instagram ads all vying for your attention, some folks are fighting back in the online space by creating content about what products you don’t need. It’s a refreshing take on content creation when compared with a decade of “clothing hauls” and “kitchen restocks.”
While you may not think much about it, the kind of content you consume online can directly influence your money decisions. When faced with hours worth of videos showcasing new and fancy items you can’t afford, it’s easy to find yourself putting a few extra purchases on your credit card, or feeling tempted to take on home renovations you aren’t prepared for.
Social media makes it easy for us to feel inferior, or jealous. It alters the way we see our lives, and can cause us to overlook all the incredible things we do have. That’s why we encourage you to unfollow any accounts that leave you feeling envious, or self-conscious. Remember, companies (and influencers) profit from making you feel this way!
Instead, replace this content with media that leaves you feeling inspired, encouraged, and like you’re part of a community. Commit to continuous learning by reading a money book every quarter, listening to personal finance content, and following frugal creators. You’ll be amazed at how much better your outlook on life will be, and how much more satisfied you’ll be with what you have now.
10. Keep the right friends
Scenario 1: Your closest friends are 5 people who spend lavishly. Every weekend they take off on a trip to Cabo, and it seems like every two weeks they have contractors making improvements to their home. Within the last year, they’ve all purchased brand-new cars, and they eat out almost every night at fancy restaurants.
Scenario 2: Your closest friends are 5 people who love to spend their weekends thrifting, hiking, and BBQing with their families. They save up all year for a few nice trips and drive safe but cheap used cars. They invite you over to their homes often for homemade dinner and drinks.
In which scenario do you think you’re more likely to take on debt?
Yes, these are extreme examples of polar opposite friend groups. But the main point is that the people we surround ourselves with will have a huge impact on our expectations, behavior, and outlook. Spending more time trying to keep up with folks who don’t give personal finance much thought, or who spend lavishly, can put us in a poor financial spot.
Likewise, if we spend more time with frugal people with whom we can share knowledge and motivation with can help us to reach our goals more quickly, and enjoy the journey more. Having frugal friends helps us to curb our consumption. Debt-free people seek out like-minded friends with similar habits who inspire them to continue down the path toward financial freedom.
11. Using credit cards wisely
Debt-free folks also have good credit card habits. They always follow the golden rules of plastic, i.e., the best credit card practices.
While some personal finance gurus demonize the use of credit cards, we see it as a tool that can be used well, or used poorly. For example, if you use a chainsaw the wrong way, you could end up taking a poorly timed trip to the emergency room. But does that mean that chainsaws are inherently bad? Of course not!
Just like chainsaws, if you can’t use this tool responsibly, we recommend you don’t try. However, if you can master a few basic principles, credit cards can benefit your financial life. They can help build your credit, make it easier to track your spending and earn awesome rewards.
Here are the golden rules to stick to when using credit cards:
- Pay off your entire balance each month, every month.
- Only buy things you have the cash to cover
- Never take cash advances
- Carefully evaluate rewards vs. annual fees
If you follow these rules strictly, you will not accrue credit card debt. Instead, you’ll get some awesome perks like cash back, travel miles, sign-up bonuses, cell phone insurance, and more!
Wondering what the best credit card for you is? Be sure to check out our free credit card tool, which allows you to compare the best credit card sign-up bonuses on the market right now.
12. Have clearly defined financial goals
Debt-free people set both long and short term financial goals, then build saving habits to achieve them. It’s much easier to remain fiscally responsible when you’re clear about the why behind your money!
When you have clear financial goals, both big and small spending decisions become much easier. Should you get an unexpected lump sum of money, like a tax return or an inheritance, there’s no question as to what you’re going to do with it because you’ve already decided which goals you’re prioritizing. On a day-to-day basis, reminding yourself of your short-term goals (eg. saving up for a trip) can help you avoid frivolous spending.
13. Getting on the same page with partners
In a recent survey, Bankrate found that 42% of married people, or people living with a partner have hidden a financial secret from their significant other. Yikes! 😬
It’s no secret that financial transparency between partners leads to stronger relationships. Couples who share a bank account and combine finances report greater relationship satisfaction. However, talking about money with your partner can come with benefits beyond a happier relationship.
When you and your partner share the same financial goals, you have an accountability partner who can help you attack it. And, if you’re recovering from a past poor financial decision, you’ll have someone on your team who can help to you stay motivated throughout the process. Debt-free folks understand the importance of being open about money in their relationships and make habits to touch base frequently with their partners. Put that money date on the calendar!
14. Embrace frugal hobbies and activities
Debt-free people can’t possibly be fun too. No one has it all… right? RIGHT?
False! Debt-free people really can have it all, because they make lifestyle choices and habits of regularly enjoy frugal hobbies and activities. They’ve learned that you don’t need to shell out a ton of cash to enjoy life. Trying to stay entertained on a budget can encourage even more creativity and fun!
There are so many free and cheap ways to have a blast on your time off from work. Hiking, visiting your local library, and free community events are all great ways to stay entertained for less and meet new people.
Plus, developing fulfilling hobbies now can even help you to have a more enjoyable retirement! The happiest retirees have meaningful activities and relationships to retire to.
15. Practicing gratitude and contentment
One of the best ways to avoid debt is to work on practicing gratitude and contentment. When you appreciate what you have, you’re more likely to feel less inclined to overspend on things you don’t truly need.
Here’s a super easy way to implement more mindfulness and gratitude into your life: Every morning when you wake up, try to think of one thing you are grateful for. It can be a person you love, or even something as simple as your favorite blanket. Write it down in a notebook, or in your notes app on your phone. Then, whenever you’re feeling down, read all the things you wrote down to cheer yourself up.
The secret to having it all in life → is realizing that you already do.
The Bottom Line:
Every debt-free person is unique, but this category of folks often share healthy money habits we can learn from. Simple budgeting, mindful spending, and practicing delayed gratification go a long way to building a wealthy life, free from debt.
The key to healthy finances lies in our everyday habits. The more positive ones we can implement, the more likely we are to stay out of trouble and live a stress-free life!
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