Maintaining A No-Debt Lifestyle

Linda Clayton hates being in debt. Her fear of debt is such that she recently used a settlement from a car accident and her savings to pay $40,000 in cash for a BMW X5 SUV, just to avoid taking on a car note. Clayton’s biggest fear, however, is that she “might wind up being homeless” if she assumes too much debt. “I feel I have to pay off every bill that I have every month because I don’t want a finance charge [that] will only keep growing,” says Clayton, 45, who lives in Centreville, Virginia, and makes $73,000 as a business analyst with Fannie Mae.

Clayton’s aversion to debt stems from her college days and early work-life when she ran up about $38,000 in credit card debt paying for school expenses, a fully furnished one-bedroom apartment, and leisure travel.

While debt can be the thief that robs many people of substantial wealth, there’s a downside to Clayton’s approach — cash flow problems. She owns a one-bedroom, riverview co-op in the Bronx, New York, but she’s been unable to rent it, in part because prospective tenants desire units with two or more rooms. With no tenant since July 2002, she’s been paying the mortgage and maintenance fees herself — a total of $1,000 a month. She refinanced the mortgage in 1991 and took cash out to consolidate the debt, leaving an amount of $12,946 to pay off the 15-year mortgage on the New York co-op. Maintaining the $1,000 monthly payments on the co-op for the past year has drained her savings. On top of that, she has a mortgage on the three-level, three-bedroom townhouse that she occupies — another $1,658 a month.

Because Clayton is determined to pay off every bill when it comes in, her tendency to rack up $800–$1,000 in monthly credit card charges creates her cash crunch. “I really don’t have any idea what I’m buying, but I charge a lot of things like cable TV, my cell phone, and long distance bills to earn frequent-flyer miles,” says Clayton, who is enrolled in graduate school at George Mason University in Fairfax, Virginia, completing a degree in adult education. She sheepishly adds that she often buys expensive items for the house or car, citing, for example, $1,050 (including installation) for a bike hitch and rack for her car so she can take it with her when she travels.

The carefree divorcée loves to exercise and travel outside the U.S. She takes off on Caribbean spa vacations and African excursions to study dance. Clayton doesn’t want her “good life” to change when she retires, which she hopes to do in the next 15 years (or less if possible). “I’m afraid of not being able to maintain the lifestyle I’m living now when I retire. I want to be able to travel, eat organic vegetables, and do whatever I want to do,” says Clayton, who dreads becoming poor.

If Clayton’s dream of an early retirement is to become a reality, she needs to do three things: improve