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Pay Down My Debt

What a Debt-Free Lifestyle Really Looks Like

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through a credit card issuer partnership.

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When it comes to debt, most of us have outstanding balances of one kind or another, whether for our car, our home or our education. And while debt can be a necessary tool to achieving certain goals, most Americans (nearly 60%) report feeling weighed down by what they owe, a February 2020 survey by LendingTree found.

But you don’t have to be tied to that borrow-and-repay cycle forever, especially if you have a stable income with cash flow to get ahead of your debt. The benefits of living a debt-free lifestyle can be life-changing — reduced financial stress, more money for saving and no interest payments, among them. Here is our guide on what you need to know about living a debt-free lifestyle.

What it takes to live a debt-free lifestyle

A strict monthly budget

Funneling extra cash into your debt is the quickest way to become free of it. The amount of interest you’ll owe overall will shrink, and so can your repayment timeline. But finding spare dollars to increase your payments can be tricky when you don’t know what money is coming in and going out. Making and following a budget could solve this issue.

Budgeting requires that you list out your income and subtract all expenses (such as rent, utilities and groceries) for the month. What’s left represents how much you have to allocate toward your debt. If you come up with a negative number, it means you’re running in the red and need to make some lifestyle tweaks to avoid going even further into debt.

Maybe you notice, for instance, that you’re buying lunch three times a week, paying for four different streaming services or splurging on new tech every other month. These are budget items you could easily reduce or eliminate to free up even more cash for paying off your debt.

It may seem a tedious process to track every dollar, but there are a variety of strategies and digital tools you can use to make it easier. For example, apps like Mint and YNAB (You Need a Budget) link up to your bank and credit card accounts to help you track spending.

  • Zero-based budgeting: If you struggle with making unnecessary purchases, this could be your best option. Every dollar in this budgeting scheme is given a job, even the money leftover after paying for necessary expenses. By predetermining what money goes toward debt repayment or retirement savings and what goes toward other needs or wants, you minimize the risk of having nothing leftover at the end of the month to meet financial goals.
  • 50/30/20 budgeting: Under this budgeting plan, you allocate 50% of your monthly income to major living expenses (housing, utilities, food and transportation) and 30% to discretionary spending (travel, entertainment, shopping), while the remaining 20% goes toward your financial goals, like paying down debt or saving. Of course, if you want to pay your debt down faster, you could inverse the 30% and 20% targets.
  • The 60% solution: All expenses under this budget should only eat up 60% of your income. The remaining 40% should be split among your retirement savings, long-term savings, emergency fund — and your own enjoyment. You could easily replace one of those 10% savings goals with your debt repayment or reduce the fun spending.
  • Classic line-item budget: There are no prescribed spending or savings targets under this traditional budget — instead, it’s up to you to categorize your expenses as you see fit, and then subtract them from your income to determine how much of the remainder can go to additional debt payments.

Saying ‘no’ to your wants

When you’re in a stable financial situation and looking to become debt-free, overspending on wants can be a common hurdle when maximizing debt repayment. This can be as small as charging more purchases to your credit card than you can afford to repay, or as big as taking out a large auto loan to pay for a car beyond what you can afford.

It takes discipline to break your spending habits and refuse yourself the things you want so that you can achieve your bigger goal of becoming debt-free. Buying only what is absolutely essential prevents you from adding to your debt and frees up more of your income to channel into paying off debt.

But this will be challenging to stick to, especially if it takes you a couple years to rid yourself of debt, so it is important to occasionally reward yourself for good behavior so you remain motivated. You might decide that after every few weeks you’ve gone without unnecessary purchases, you can splurge on a treat under a certain monetary threshold, say $100, that you know you can afford.

If you’re tempted to buy nonessential items, leave your credit card at home and carry cash: This way you can’t spend more than the dollars in your pocket. If online shopping gets you, remove all saved credit card and payment information from the websites you visit, unsubscribe from promotional emails, and mandate a 24- to 48-hour waiting period before you buy, giving you time to weigh how important that purchase really is.

Making sacrifices to live within your means

As we mentioned above, limiting unnecessary purchases, like meals out, can help you put more money toward debt repayment or avoid new debt. But if such tweaks aren’t freeing up enough cash to meet your debt repayment goals, your necessary expenses may have to change if you expect to have a debt-free lifestyle in the long term.

For instance, housing will always be a cost you have to pay, but the amount you spend can change big time depending on square footage, location or number of roommates. It may be worth sacrificing some space, privacy or convenience to find cheaper lodgings that will leave you with a decent amount in your bank account after bills so you can pay off debt.

Review your gym membership, subscription services, cable package, utility providers, cell phone service and any other fixed expenses you deem essential. Try renegotiating or changing providers to get a lower rate, find a less-premium option or cancel the service altogether. Limiting spending is the only surefire way to achieve a debt free lifestyle.

Having an emergency fund

When living debt-free, having an emergency fund is imperative to avoid falling into debt over unexpected costs, like a home repair bill. Set your sights on socking away three to six months’ of take-home pay in an emergency fund. Self-employed or freelance workers with variable income may want to tuck away a bit more — about nine months’ worth of expenses — to cover any earning lulls, as well as any surprise bills.

Keep your fund in a high-yield savings account. You could earn better interest than with a typical checking account, while still being able to easily tap the money whenever you want without incurring fees or time delays.

Debt vs. savings: Which comes first?

Both do. Just because you have competing money goals doesn’t mean you have an either/or situation. You can achieve both at the same time.

An emergency fund is key to avoiding acquiring more debt when an unexpected event occurs. Press pause on your hefty debt-payoff efforts for a brief spell to focus on building a $1,000 foundation for your emergency fund. Once you hit that milestone, you can resume tackling your debt until it’s knocked out, at which point you can switch back to building your savings up to the three- to six-month mark.

Retirement savings shouldn’t be put on hold, either. You don’t want to be so laser-focused on paying off debt that you rob your future self of a comfortable retirement. If your company offers matching contributions to retirement saving accounts, like a 401(k), you should prioritize stocking enough away in those accounts to get the full match. Otherwise, you’re turning down money from your employer.

The main benefit and risk of living debt-free

You’ll save more money on interest in the long term

Whenever you borrow money to finance a purchase, you must pay back the lender that original sum plus interest and other fees. The interest rate will change depending on the lender and the kind of debt, but it is always a percentage of the loan amount. (Many lenders charge compounding interest, meaning you pay interest on the interest you owe each month.)

Avoid debt and you skip having to pay interest altogether, meaning the cost of any item you’ve bought is the actual total cost you’ll pay for it. Those carrying debt balances with high interest rates will really feel the impact of becoming debt-free on their purse strings.

For example, let’s say you have a $3,000 balance on a credit card with an 18% interest rate and a $125 minimum monthly payment. Here’s how long it’ll take you to get out of debt and how much interest you’ll pay if you put up that minimum each month, versus a higher sum.

Your monthly paymentNo. of months needed to repay the debtTotal interest paidTotal repaid% of payments that went to interest
$125 payment30$747$3,74719.9%
$225 payment15$372$3,37211%
$325 payment11$253$3,2537.8%

To put into perspective how valuable these kinds of savings are, consider this: If you took $400 that you were spending each month on debt and redirected it toward a Roth IRA, it would grow to more than $487,000 over the next 30 years, assuming 7% annual returns, if compounded monthly.

You might struggle to build or maintain your credit

While avoiding debt and living a debt-free lifestyle may be a healthy way to manage our finances, it doesn’t mean you should swear off credit altogether. You will likely need to borrow again at some point to afford a large purchase like a new car or home, and having a good credit score is the key to landing those loans with an affordable interest rate.

A number of factors go into determining your credit score. For example, 15% of your FICO Score is determined by the length of your credit history. New credit makes up 10% and having a mix of credit counts for another 10%. In other words, actively using credit responsibly accounts for 35% of your credit score. Going completely credit-free translates to a thin credit file that can impact important financing options down the road.

The good news is you have two major options if you don’t have to sacrifice a debt free lifestyle to maintain a good credit score:

  • Use credit cards responsibly: This means paying off your balances on time and in full every month and never carrying a balance. Your credit utilization ratio (i.e. how much of your available credit you’re actually using) makes up one-third of your FICO score — creditors like to see that you’re using less than 30% of it. Those with reward credit cards may even make a little back on everyday spending.
  • Consider a secured credit card: If you don’t trust yourself with a credit card, a secured credit card could be a solution. These cards require you to put down a cash deposit, which determines the credit line (typically between 50% and 100% of the deposited amount). After that, you can use it like a regular credit card without the fear of overspending. Not carrying a balance and making on-time payments is key to boosting your credit as your activity is reported to the credit bureaus. But if you miss payments, the bank will hold your deposit as collateral and apply it to your outstanding balance and charge high fees.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Banking

Ally Bank vs. Simple: How Do They Stack Up?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Banking has changed a lot since your parents’ days. Today, most Americans do their banking online — it’s easier, it’s often cheaper and online banks definitely offer the highest rates you can find if you look in the right places.

Ally Bank and Simple are two of the frontrunners in the online banking space. Simple is not actually a bank itself, but a fintech company that is owned by and partners with BBVA USA. Ally, meanwhile, is an internet bank that offers a wide range of products. Both are good options and offer plenty of consumer-friendly features, but in different areas. One may be better suited to you depending on what you’re looking for in a bank.

Ally Bank vs. Simple: A look at the online banks

Ally Bank has many fans in the financial community, and for good reason. It’s been around since well before the internet existed — 1919, to be precise, when it was known as GMAC — and it has weathered the transition to a digital existence better than most of its competitors. Often, people are worried about a lack of customer support with online banks, but Ally Bank has better hours than brick-and-mortar banks: It offers 24/7 customer support through phone, live chat, snail mail and secure email message within your account.

Ally Bank also offers a full suite of products that you’d expect from a bigger-name bank, including checking accounts, savings accounts, loans and insurance products, among others. While it offers a high interest rate, it doesn’t offer any fancy tech tools, instead preferring to stay more like a traditional bank — only located online.

Simple, on the other hand, is a new kid on the block, as it got its start in 2009. Because Simple is a fintech company and not a bank, any money you deposit with Simple actually lives in a BBVA USA bank account. Thus, your money is covered by FDIC insurance, just like at any other bank.

Simple has shaken up the banking world with its helpful tools for managing your day-to-day financial life, although it is limited in comparison to Ally Bank with regard to the financial services it provides and its customer support services. You’ll also need to be very comfortable with managing your finances on your smartphone to fully take advantage of Simple’s account services.

Ally Bank vs. Simple: How they compare on rates

While Simple does not offer a true savings account, it does offer the option to use its built-in savings tools to partition off money in a Savings Goal Account if you open a checking account. You can earn a rate of 0.80% on this Savings Goal amount, which is higher than the APY that Ally Bank offers on its savings account.

However, money that is not partitioned into a Savings Goal account at Simple earns a mere 0.01% APY. Ally Bank offers an APY of up to 0.25% for checking account balances over $15,000, which far exceeds the online bank average.

If you’re interested in opening a CD, it’s really no comparison because Simple doesn’t even offer CDs. Ally Bank offers an above-average rate on its one-year CD, though its rate on its five-year CD is currently slightly below the online bank average but still above the overall national average.

 Ally BankSimpleNational Average*Online Bank Average*
Checking0.10% on balances under $15,000

0.25% on balances over $15,000
0.01% - 0.80%0.202% APY0.41% APY
Savings0.80%N/A0.284% APY1.52% APY
1-year CD0.75%N/A1.365% APY2.09% APY
5-year CD1.00%N/A2.159% APY2.70% APY
*As of date of publishing

Ally Bank vs. Simple: What account options are available?

Simple reliably stands by its name: It offers a simple account structure, composed of just a checking account with the option to set money aside to reach savings goals. If you’re researching Simple, you might notice that there are unique names for the accounts options available. Your checking account is comprised of Expenses and Safe-to-Spend buckets, while the Protected Goals Account is designed for your savings goals.

Ally Bank, on the other hand, offers a more full-service suite of products, including an interest-bearing checking account, a true savings account, three types of CDs with a variety of term lengths and a money market account. Additionally, it offers options beyond what’s listed here. This can come in handy if you’re trying to use certain financial tools for particular purposes, such as saving money in a CD ladder to earn higher rates.

 Ally BankSimple
Checking account
Savings account
Certificates of deposit
Money market account

Again, Simple makes things simple by not charging any of the common bank fees, including overdraft fees. It’s able to do this because it doesn’t actually accept overdraft charges at all — meaning that if you try to overdraft your account, the transaction will simply be declined and you’ll have to find another way to pay for the item, or simply not buy it.

Ally Bank also offers very fair policies, although it does charge more fees in some cases. It charges $25 per paid overdraft, though this charge is capped at one per day. Plus, this charge is relatively easy to avoid. For example, if you designate your savings account or money market account for overdraft transfers, you won’t be charged a fee to cover your charge. You’ll just have a lower savings account balance at the end of the day.

Ally Bank also offers a particularly good ATM policy. You won’t pay any ATM fees with Ally Bank for either in-network or out-of-network ATM use. Out-of-network ATMs may still charge a third-party fee from the ATM’s owner, but Ally Bank also does you one better here: It will reimburse you up to $10 per month for these charges. While Simple doesn’t offer reimbursement for these charges, it still does not charge fees for either in-network or out-of-network ATM usage.

 Ally BankSimple
Standard checking account$0$0
Standard savings account$0N/A
ATM fee$0 at in-network ATMs; up to $10 reimbursement per month for third-party ATM fees$0 at in-network ATMs; no third-party ATM fee reimbursement
Overdraft fee$25 per paid overdraft, maximum one per day; $0 for overdraft transfer$0

When to choose Ally Bank

  • If you already have a good handle on budgeting
  • If you want a larger range of financial products, including a savings account and CDs
  • If you want more access to customer service

If you already have a good handle on your finances, including the creation of a budget, then Ally Bank is probably a better choice for you. It doesn’t offer any fancy systems for budgeting, instead assuming, like most banks, that you can figure this out on your own or use another program, such as YNAB.

Besides, once you’ve broken out of the cycle of living paycheck-to-paycheck, you’ll probably be ready for products like CDs and money market accounts, which Ally Bank offers and Simple does not. These accounts can sometimes be tricky to navigate (such as when it comes to understanding how the early withdrawal penalties on a CD work, or what you need to open a trust account), so having Ally Bank’s stellar customer support will also prove helpful in this area.

When to choose Simple

  • If you want to get a better handle on managing your finances and budgeting
  • If you interact with your mobile phone frequently
  • If you’re tired of paying bank fees

If you find yourself avoiding your bank account because you’re afraid of what you’ll see, Simple might be a better account for you. Its budgeting tools are top-notch and do what any more seasoned budgeting program does, except it is integrated right into your bank account and does all of the money funneling automatically for you. It’s for people who are more tech-savvy than finance-savvy, to put it simply.

That’s not to say you need to be bad at money to be best for Simple. Even money managing pros might find that Simple offers a better solution to how they’re currently managing their money. However, since Simple isn’t as much of a one-stop-shop for financial products, chances are you’ll need to branch out to other banks or financial companies if you want to open a CD or money market account, start an investment and/or retirement account or get a loan. But for what it currently does, Simple does it well, and many people can benefit.

The bottom line: How do Ally Bank vs. Simple stack up?

Both Simple and Ally Bank offer plenty to like: high interest rates, a slick design, few fees and a customer-focused (rather than shareholder-focused) company culture. That being said, we’d steer people who are already confident (or at least mostly confident) in their money-handling skills toward Ally Bank. It offers more higher-level financial products and more accessible customer service, though with less of the shiny tools that fintech companies — like Simple — offer.

For those who need some help managing their money or who want to think less about the ins and outs of budgeting, Simple is better. It puts banking into more human terms. However, it doesn’t offer financial products like CDs, money market accounts, retirement savings accounts or trusts.

It also doesn’t necessarily have to be an either-or choice, though. Once you do get to the point where you’re considering banking products beyond your checking and savings accounts, you can either switch banks or stick with Simple and open an account à la carte at other banks — like Ally Bank — accordingly.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Money Management Tips to Help You Save Successfully

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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Increasing your savings is easier said than done. The National Endowment for Financial Education’s most recent annual consumer survey found that saving money is the biggest cause of financial stress for more than 51% of Americans. If you feel the same way about your savings, don’t despair. There’s a way to manage your money instead of letting it manage you.

Top 14 money management tips

Have enough income to cover your monthly expenses, but can’t seem to gain traction when it comes to building a college savings fund, saving for a down payment on a home or growing your retirement nest egg? Start by taking charge of your finances by using these simple, yet practical, money management tips.

1. Use a budgeting app

Tracking your spending on the go is easy when you use a budgeting and personal finance app, like Mint or YNAB. Simply download your app of choice and, if you want to, link it to your bank account. You can then input your fixed and variable expenses and monitor your spending with the swipe of a finger. Keeping your budget within arm’s reach also helps you to stay on top of your daily spending and stick to a monthly budget.

2. Trim unnecessary expenses

Examine your spending habits to determine where you can cut unnecessary spending. Food is a common expense that can be reduced with a little planning. A grocery shopping list can be your first line of defense against overspending, as it’s easier to make impulse buys at the grocery store when you don’t have a shopping list to guide your purchases.

3. Commit to a written savings goal

Establishing a clear savings goal can keep you motivated and put a stop to impulse buys. Make your goal SMART: specific, measurable, attainable, relevant and timely. For example: “I will transfer $100 a month to my savings account so that by Month 20YY, I will have $800 to put toward a new television.” Post your written goal in visible locations to help reinforce your commitment to achieving it.

4. Live below your means

Spending more than you earn is a recipe for financial heartburn. When you have more bills than money with which to pay them, you could be subject to late fees and other financial penalties which make it harder to save. Cancel services you no longer need or can access at a lower cost. For example, nix the gym membership if you haven’t used it in five months or downgrade your cable package to only include the channels you actually watch.

5. Pay off debt

Eliminating debt may allow you to save more money. By bringing your balances to zero as quickly as possible, you’ll save on future interest charges. To potentially save money now, consider refinancing your debt to a lower interest rate or transferring your debt to a credit card with a lower interest rate.

Once your credit cards and loans are paid in full, you’ll have additional funds to contribute toward your financial goals. Use the same amount you were paying your creditors each month and deposit those funds into your savings account.

6. Build an emergency fund

Financial experts recommend stashing three to six months of living expenses in a liquid high yield deposit account in case of an unexpected job loss or another financial emergency. If this sounds overwhelming, start with a smaller goal of $500 for your emergency fund.

You can grow your emergency fund account by setting up an automatic transfer from your checking account to your emergency savings account each pay period. To grow your emergency fund faster, consider cutting unnecessary expenses, selling unused items around your home, depositing your tax refund or starting a side job.

Without an emergency fund, you risk paying for your next dental emergency or major car repair with your credit card or a personal loan, which can keep you in a debt cycle that’s hard to escape.

7. Increase your income

As long as you save the money instead of spending it, increasing your income with a side hustle, part-time job or more hours at the office is one of the quickest ways to reach your savings goal.

Before adding additional work to your already busy schedule, determine how many hours you have available along with how many months or years you’ll need to commit to the side hustle. When searching for side jobs, be wary of jobs that require an initial outlay of money to get started.

8. Plan for a regular review

Block out time on your calendar to evaluate your progress toward your savings goals. Consider establishing a monthly or bi-weekly financial review. Asking yourself if you’re still on track or if you’re able to contribute more towards your objectives is key to meeting your goals. A quick assessment of your savings plan can also help identify areas where you may still need to reduce expenses.

9. Never pay full price

Online and mobile coupons make it easy to save on groceries, clothing and big-ticket items like televisions and computers. When saving money is convenient, you’re more likely to stick to your savings plan. Do you do most of your shopping online? Install browser extensions that give you cash back when you shop through their online portals. Is mobile shopping more your thing? Download your choice of mobile app that offers cash back, gift cards and notifications of online and in-store deals.

10. Eat out less

Brown bag lunches and meal planning are smart money management strategies that can save you thousands of dollars annually, but sometimes you’ll want to treat yourself. To keep your spending under control, be selective about when and where you eat out. Make a list of local happy hours, upcoming culinary events and prix fixe restaurants to reinvent what it means to eat out on a budget.

11. Bank your financial windfalls

While it may be tempting to go on a shopping spree, upgrade your ride or take a weeklong vacation in the Caribbean when you get a financial windfall, that might leave you with a financial hangover. Once the thrill has subsided, you’re no closer to your savings goal. Instead, be strategic with any unexpected funds that come your way. Commit to adding at least half of these funds to your savings account.

12. Make savings automatic

Contact your financial institution to sign up for electronic funds transfer. This allows you to designate a set dollar amount for transfer from one account to another before you spend it on something else. For example, set $50 to automatically transfer from your checking account to your savings account on the fifth of each month.

If you have multiple savings goals, use a money savings app connected to your bank account to help to make auto transfers goal-specific.

13. Entertain your options

Movie buffs and avid readers rejoice! Free and low-cost services are available that allow you to binge-watch or read the latest big hit without busting your budget.

Movie rewards programs are available across the country. These programs allow you to earn points based on the amount you spend. Points can then be redeemed for additional movie tickets or concession items. Movie clubs allow fans to consume at least one movie per month at a discounted rate in addition to concession discounts.

The public library is an often overlooked resource for endless media entertainment. Look beyond the hardcover and paperback books, and you’ll find CDs, DVDs and magazines. Many libraries now provide a portion of their catalog online, which means you can access e-books, audiobooks, movies and music on your device of choice — for free.

14. Become rate savvy

Online search tools can reduce the time it takes to locate financial institutions offering the best returns on savings deposits. Use the Maximize Your Bank Savings tool from DepositAccounts, another LendingTree company, to help you identify the best place to park your funds to meet a specific goal. The higher the annual percentage yield (APY) the account pays on deposits, the faster your money can grow. Generally, certificates of deposit (CDs) limit withdrawals but offer higher APYs over savings accounts.

Next steps

A consistent savings habit is necessary to reach both short-term and long-term financial goals. If you’re intentional with your money, you’ll see the results. Recognize each achievement for what it is — documented proof that you’re in control of your financial future. Open a dedicated savings account today, and you might only be a few months away from achieving your first savings goal.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.