Living a debt-free life might sound like a dream, but it doesn’t have to be. Your debt doesn’t have to define you or the rest of your life. To understand what it takes to become debt-free, let’s first understand what debt really is. A good definition of debt is offered by Investopedia – “Debt is used by many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances.” In other words, debt allows one party to borrow money from another to purchase what they can’t afford at a given moment.
This in itself is not a bad scenario. For example, you can borrow $1,000 from someone to make a purchase knowing that you’ll have another $1,000 deposited in your bank in a few days. If there is no interest or fee involved in borrowing this amount, you are using borrowing as a convenience. Many people use this method to build or repair their credit history. You can borrow a sum of money with low interest to invest in something that will increase your ability to earn more money in the long term. This is what education and business investments are all about. Both examples involve good debt.
If, on the other hand, you borrow funds because you want to buy something you can’t afford and it will also not increase your ability to earn more money, you are creating bad debt. Below is a great visual by Debt.org that helps to understand the difference between good and bad debt.
If you read the Bible, the dangers of living in debt have been recognized since ancient times. As Proverbs 22:7 says: “The rich rules over the poor, and the borrower becomes the lender’s slave.” Clearly, the need to borrow money is not a new phenomenon. However, unlike in earlier times, borrowing has become extremely accessible today. Without good financial knowledge, personal budget, and financial discipline, many people find themselves accumulating more debt each month.
Did you know that “on average, Canadians carry $22,125 in non-mortgage debt, which includes credit cards and many lines of credit”? Unless this debt is an investment in education or some sort of investment, it’s bad debt. Thinking about $22,000 debt is something that can keep anyone up at night, so it is also a health hazard. As such, achieving a debt-free life needs to become your priority for more than one reason.
So what does it really take to conquer your debt and live a debt-free life for good? Here are the 7 steps that can make it happen:
1. Recognize the fact that you have bad debt. If you continue living and spending as if you don’t have a large debt, or that you are totally able to pay it off but prefer not to, you are in denial. Living in denial never helps and tends to make things progressively worse.
2. No matter how much you might dislike accounting and budgeting, create your personal budget. Having a budget will help you clarify how much money you actually have, spend, and can use to get out of debt. Go through your expenses one by one, and cut everything that is not essential until you are debt-free. You can keep one small “luxury item” on the list so that you can still enjoy your life while repaying your debt. This means that you need to cut on an expense somewhere else and stick to it.
3. Start using the Debt Snowball strategy. If you haven’t heard of this debt repayment strategy yet, you will be amazed at the results it produces for many people. To understand how it works and how you can use it to get out of your own debt, read Dave Ramsey’s article on this subject.
4. Consider debt consolidation. If you have various debts from different lenders, it can be quite overwhelming to figure out which lender to pay first and how to manage the repayment schedule. Debt consolidation works well for this scenario, especially if your current income makes it difficult to put money towards repaying the debt. “In addition to streamlining your debts into a single payment, a debt consolidation loan may also offer you an interest rate that is lower than that charged by your creditors saving you money in interest charges.” (source: Office of Consumer Affairs) This is an attractive strategy but will require you to repair your credit score after you finish repaying your debt.
5. Use smart saving strategies to stretch your monthly budget. Doing so will help you develop better spending habits, and create extra savings to put towards your debt. One of the biggest expenses besides housing is food consumption. Start cooking and eating at home most of the time, and carry snacks for yourself and your kids whenever you go out. Read my post about 25 Easy Ways To Save Money on a Tight Budget and see more money saved each month!
6. Upgrade your professional skills. Regardless of where you are in your career and life, you will always benefit from growing your professional knowledge and skills. Many employers have professional development programs, so you can enroll in a program that will advance you in your career. If your company doesn’t offer this program then start setting aside time for self-education at least a few times a week. Go to your nearest library, or take a free course online. Try to do something each week to increase your professional knowledge. Observe the gaps that exist in your company, and learn something that will help your employer address these gaps with your help. By creating a value in your workplace, you can negotiate a specific increase in your pay. Higher pay will help you repay your debt faster and improve your financial health overall.
7. Give more. This might sound counterintuitive if you are trying to get out of debt. Yet, honing your ability to give more even if you don’t have much is essential if you want to improve your relationship with money. In most cases, accumulation of debt is a symptom of the scarcity mindset. We don’t feel confident unless we have more, and we are willing to pay the price of getting there. In contrast, the abundance mindset “flows out of a deep inner sense of personal worth or security.” (John C. Maxwell) Something miraculous happens when you start making a conscious choice to give more to others. Not only you’ll multiply your ability to do something meaningful with the resources you have, you’ll also redefine your dependence on money as a source of self-worth. This is a powerful concept and I encourage you to explore ways to give that bring you more joy.
Remember, being in debt doesn’t have to define who you are. It also doesn’t have to define the rest of your life. Living a debt-free life is possible for you and everyone else who makes it their goal. Use the proven strategies mentioned above to get yourself out of debt, and reap the benefits of freedom it offers. You can do it!