Breaking free from debt: Your roadmap to financial liberation
Thomas Fuller, a mental calculating prodigy in the 1700s, once said, “Debt is the worst poverty,” for a very good reason.
Even way back hundreds of years ago, debt haunts society as much as it does now – dealing not only a financial burden but physical, mental, and emotional turmoil as well.
According to a study, debt has caused significant psychological ill effects, including high anxiety levels, depression, suicide, reduced marital satisfaction, and many more. In a piece by Debt.org, America’s Debt Help Organization, household debt increased to $16.9 trillion by the end of 2022, hitting a record high and growing by $2.75 trillion since 2019.
Debt causes poverty, and in turn, poverty causes debt. In between this mad cycle, we must figure out how to break free from debt and repurpose our practices and finances with healthy finance and debt practices.
Debunking myths about debt
Believe it or not, not all debt is bad. Debt is a normal economic phenomenon for all social classes – from credit card use, house and auto mortgages, business loans, and many more.
A company’s debt is just as necessary as its capital sources. Not all businesses can finance all their purchases in cash, and using debt, like business loans or bridging loans to finance capital expenditures and accounts payable to vendors, are smart credit purchases to leverage available cash to more urgent purchases and expenses.
For individuals, healthy debt ratios and practices help you build personal and business credit and earn specific rewards – as is the case in credit card uses.
According to Mark Pierce, CEO of Colorado LLC Attorney, “Non-repayment of debt is civil in nature and cannot be a source of a criminal case subject to imprisonment. Institutions can file a civil case to mandate the payment, but you can never go behind bars for non-payment of debt.”
However, what’s not a myth is that irresponsible debt management – for businesses and individuals alike – will eventually lead to more crippling debt, additional charges, bad credit, and continuous poor financial decisions.
Seven steps to help you break free from debt
Breaking free from debt requires patience and perseverance – from spending habits and financial planning to managing your income and expenses. Here are seven steps to helps you break free from debt.
1) Understand your debts
The first step to breaking free from debt is understanding them—where they come from, why you couldn’t pay for them, and the kinds of debts that comprise your debt portfolio.
Collect all your credit card statements and other statement of accounts, and figure out how much you owe and how much interest you pay each month for each debt. Doing this will give you a clearer picture of all your debts and the interest you pay for them, and then devise a plan to repay these debts.
Alex Milligan, Co-founder & CMO of NuggMD, says, “Dealing with a multitude of debt records may be taxing, mentally and emotionally, but getting them together will help you take the first step not only to financial liberation, but mental and emotional peace as well.”
2) Set a repayment plan for your existing debts
It is important to set a repayment plan for your existing debts. Here are some suggestions to help.
Prioritize high-interest debts
Once you have a clear picture of all your debts, the first thing you need to do is prioritize high-interest debts first. High-interest incurring debts usually come from personal loans and credit cards.
According to Equifax, personal loans have an average of 10 percent to 29 percent interest rate, while credit cards range from 15 percent to 30 percent. When these kinds of debts remain unpaid for a long period, interest compounded will significantly increase debt – and sometimes, the interest charged can go even higher than the original amount owed.
Balance transfer
If you have existing credit card dues, why not transfer your balance to another credit card? Transferring your balance allows you a more relaxed payment installment period, ranging from 1 year to 3 years, with a fixed interest rate per month.
Debt consolidation
If you have more than one delinquent debt like credit card dues, personal loans, unpaid mortgages, etc., consider doing a debt consolidation. Debt consolidation allows you to roll all your existing debts into one to simplify payments at a lower interest rate than what you’re paying for all existing delinquent loans.
3) Fix your spending habits
If you have already fixed your delinquent debt records or are in the process of paying off your debts, the most important thing to do to avoid getting into another debt is to fix your spending habits.
While debt is okay to finance necessary purchases, debt becomes a problem when we start swiping all our purchases without thinking twice about when or how to pay for these purchases in the future.
Tom Nolan, Founder of All Star Home says, “Often, crippling debt comes from the mentality that you’ll be able to ‘afford this later’ without a clear assurance of your capacity to pay later.”
To fix your spending habits, you must:
- Shop with a list
- Charge only what you can afford
- Think and wait before you buy
- Prioritize your needs over your wants
- Always check if there are cheaper options
- Make a budget, and stick to it
4) Build an emergency fund
Often, crippling debt comes from sudden huge financial emergencies, like hospitalization or burial expenses. Without a proper emergency fund to source money from, our next best choice is to take out credit card cash advances or avail of personal loans—with both being usually high-interest-bearing loans.
According to Jack Underwood, CEO & Co-Founder at Circuit, “Financial liberation is synonymous with having the means to pay for planned and unplanned expenses without incurring additional debt. The first step to financial liberation is ensuring you have enough emergency funds for any emergency needs.”
There’s no standard to how much your emergency fund should have, but most people would save six months’ worth of their monthly expenses as an emergency fund.
5) Set a budget
Setting a budget is not only applicable and helpful for businesses and organizations but for our daily lives as well.
When you set a budget, you examine your average income with your planned necessary expenses and savings, with an additional buffer for emergency expenses to account for how much money would go to which expense.
Setting a budget—and sticking to it—means that you only spend within your planned means, even when you’re simply doing a grocery run or looking for gifting options.
6) Increase your income
Breaking free from debt does not only mean examining your cash outflow but managing and increasing your cash inflow as well.
To achieve true financial liberation, one must earn enough money to pay for existing debts, whether in whole or settled, through balance transfers or debt consolidation.
Stephan Baldwin, Founder of Assisted Living, says, “Your repayment plans won’t matter unless you know you can pay for the new repayment terms, or you’ll find yourself drowning in even more debt with a new repayment plan with renewed interest payments you can’t afford.”
7) Consult a financial advisor or do credit counseling
If you struggle to manage your debts or financial habits, consulting a financial advisor or credit counselor is the best way to address this.
Do note that financial advisors and credit counselors are professionals with different financial specialties. While financial advisors help you build wealth and practice smart financial decisions, credit counselors or financial counselors advise on managing debt, finances, expenses, and budgeting.
Practice healthy financial practices to retain healthy debt
Breaking free from debt does not necessarily mean eliminating and staying away from any kind of debt. It means you must practice healthy financial practices to retain healthy debt – from managing your income and expenses and paying off high-interest loans to keeping your financial goals on track.
