Many of us may feel like it is impossible to live without debt because of the way certain purchase experiences are structured in our society. For big-ticket items like cars, higher education and homes, financing with loans and mortgages is the norm. However, if you think there has to be a better way, you may be right. Read on for an examination of common borrowing situations and how you can avoid taking on stifling amounts of debt - or in some cases, any debt at all.
Most of us live in cities and towns where the automobile is considered the primary form of transportation; while there may be a bus system, most people consider it a subpar way to get around. Of course, even the cheapest new car can still cost over $10,000, which is more money than most people can afford to fork over at one time.
One alternative that many people do not consider because of their misconceptions about the experience is buying a used car (with cash) from a private seller. Issues with this choice often spawn from older cars being less reliable sometimes more costly to repair. Or, buyers may be concerned about getting ripped off by the stranger they purchase the vehicle from or worry that they'll unknowingly purchase a stolen vehicle. However, if you do some research and choose a model known for its reliability like a Volvo or Honda, you can have a reliable older car for less. There are simple precautions anyone can take to avoid getting ripped off, like verifying that the VIN on the dashboard matches the VIN number on each of the front door stickers; you should also take the car to a reputable mechanic for an inspection.
Another thing to consider is that the salesman at the car dealership is no less a stranger to you than the person from the classified ad. Sites like Craigslist make it easy to find vehicles for sale by individual owners in major cities. It's true that you might have expensive repairs from time to time, but if you choose your car carefully, you'll still come out ahead over the much higher expense of buying a car new and paying 5% or more in annual interest on an auto loan. (To learn more, see Car Shopping: New Or Used? and Wheels Of A Future Fortune.)
|Watch: Prioritizing Debt|
There are some purchases for which you are seemingly required to have a credit card, such as staying in a hotel or renting a car. Some businesses, however, will accept a debit card with a major credit card company logo on it in lieu of a credit card. Be aware, however, that to use your debit card in these situations, most companies will place a hold on a portion of your funds in the amount of several hundred dollars so they can collect payment if you damage their property. This means that if your checking account balance hovers near zero, you won't be able to use your debit card in these situations.
Even if you do keep a comfortable amount of money in your checking account, you'll want to do some advance planning to make sure enough funds will be available to cover any outstanding or upcoming payments while the hold is on your account. The best way to do this is to find out in advance how much the hold will be for and then treat this as an expense. When you've safely returned the car or checked out of the hotel, you can then "refund" the held money back to yourself. (For related reading, see Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Not all rental car companies and hotels will accept debit cards, so you'll need to do some calling around to find a place that will. Keep in mind that some national chains are franchises and payment rules can vary by location, so instead of calling a hotel's national toll-free number to inquire about payment, you should call the front desk of the specific location where you want to stay.
According to CollegeBoard.com, a four-year degree at a private institution is topping out at more than $26,000 per year. Even state schools cost more than $7,000 year according to the same report, which is beyond the reach of many families. (For background reading, see Preparing Parents' Pockets For College Tuition.)
While it may sometimes seem like everyone is going straight from high school to college, many students actually don't take this path. Many start working during and after high school to save up money for college, or work part-time while attending classes.
Scholarships are always an option, but they often aren't available to people who don't stand out in some significant way. If you're not the Alabama Jiu-Jitsu champion or a breeder of rare lizards, but rather a straight-B student who plays acoustic guitar, you'll probably get stuck footing most of the bill for school.
If your family's income is on the lower side, you might qualify for enough need-based aid (in the form of grants) that can help pay for a four-year university, but to increase your odds of getting that aid, you'll have to apply to a lot of schools, which is both time-consuming and expensive. However, if you can find a school that needs someone like you, you may be able to get a significant scholarship even if your credentials aren't extraordinary. For example, perhaps there is a small university in North Dakota that would happily pay to have you because they aren't highly competitive academically, they don't have enough students from Florida, and they're looking to expand their music program.
What about paying for expensive post-graduate programs like medical school and law school? While the costs of these programs may be insurmountable (by the time you saved up enough to pay for law school outright, you will have wasted many years of your potential career), you can at least try to ensure that the cost will be worthwhile by getting some practical experience in your chosen field before you commit your time and money to another degree. If you think you want to be a doctor, try working as a receptionist in a doctor's office, as a volunteer in a hospital or nursing home, or even getting a less time-consuming and less-expensive nursing degree before committing to med school. Postponing your educational plans by a few years isn't such a bad thing when you're gaining practical experience in the field. Most importantly, if you discover that you hate it, you won't have wasted all that money and effort on school, and you'll be one step closer to figuring out what you really want to do. If you really want to go now, don't expect Harvard to foot your bill for law school, but as in the example above, a lower-tier school might give you a scholarship, or at least have lower tuition costs. (For more on college planning, read Invest In Yourself With A College Education and Graduate With A Degree In Financial Security.)
|Watch: Consolidation Debt|
A Place to Call Home
In some areas, prospective tenants must pass a credit check, which usually means that you'll need to have a credit history. How can you have a credit history if you don't have any credit cards or loans? It seems unfair to require a person to prove his or her financial responsibility by forcing that person to incur debt, however temporary. Most people would argue that the complete absence of any debt also proves a certain amount of financial responsibility, but if your landlord isn't one of them, you can always sublet a room from an individual who doesn't care to perform a credit check. You might also have better luck renting in a part of town near a college, because many college students don't yet have credit histories and area landlords will be used to this. It is possible to rent an apartment without a credit history, but your options may be somewhat limited. (For more on getting an apartment, read Are You Ready To Rent?)
As far as buying a home, if you want to pay all cash, you'll almost certainly need to choose an inexpensive area to live, at least initially. For example, most people will never have enough money to pay cash for a two-bedroom starter home in even the suburbs of a pricey city like Los Angeles, where most homes can cost well over $500,000 dollars. People who have that much money saved up are often near retirement age, which is longer than most people want to wait to become homeowners.
On the other hand, if you choose to live near the far edges of some major cities, it may easier to buy a home for closer to $100,000, which makes saving up to pay all cash a more reasonable (but still a fairly difficult) goal. Not having to shop for a mortgage will take a lot of the stress out of shopping for and owning a home and might even give you an advantage as a potential buyer over someone who can only put up a down payment. (To learn more, read Be Mortgage-Free Faster.)
There's no question that avoiding debt involves a certain amount of sacrifice, but it is not as difficult as you may think. Then again, when everyone around you is buying things they can't really afford, maybe you're not sacrificing anything except trying to fit in - and running the rat race with the Joneses is no way to become wealthy, anyway. Although you'll have to go off the beaten path to live a debt-free life, the peace of mind and financial security it can give you may be well worth the extra effort.
To read more on this subject, see Stop Keeping Up With The Joneses - They're Broke.