Making more money, and spending less, are important goals. However, paying off debt is the real secret to financial freedom. Adapting to life in a pandemic world has shown us that financial stability can be a fragile thing. Still, debt is one of the biggest threats to your financial wellbeing. Even if you have a stable income, debt will prevent you from making the most of it. The money you spend paying off debt could be saved for an emergency, retirement, or your child’s education—which could go a long way toward sheltering them from the burden of student loans.
Debt creates a lot of financial stress, and keeps you from living the life you want to live. In America, the amount of credit card debt carried by an average household is $5,331. Canada runs a close second at $4,154, and the UK a solid third at $3,245 per household. Keep in mind those numbers are just credit card debt, and doesn’t include things like home mortgages and car payments. It’s no wonder people are stressed.
In addition to stress, debt will hold you back in other ways. When you have the weight of owing a lot of money, you may feel pressured to work a job you hate, for less than you deserve, because you feel desperate. It robs you of control because when you walk into an interview, you feel like you need that job, and that energy will come across to your prospective employer. It affects your sense of self-worth because you feel powerless. That hit to your self-esteem can actually repel those who would hire you, as well as affect what they offer to pay you.
Once you are out from under the burden of debt, it’s a different story. You’ll exude confidence and will attract the right people, opportunities, and money into your life. Paying off debt should be your priority, and a great place to start are the debts which carry the highest interest rates. Typically, those will be credit cards. Once you have prioritized your debts, decide on a method to get them paid off. Some experts recommend a strategy called the snowball method, while others recommend the avalanche method.
The snowball method involves listing your debts from smallest to the largest. Then, divert as much money as possible toward paying off the smallest one, while still paying the minimum payments on the others. Once you’ve paid off the smallest debt, move up to the next smallest debt and so on.
The avalanche method is a bit different. This method recommends you list all your debts by their interest rates. The debt with the highest interest rate should be paid off first, then move to the next largest interest rate. The idea behind this strategy is you’ll save money by limiting how much of your money is going toward interest over time.
Either of these strategies can work for you, the key is to decide which one best fits your situation and then sticking with it until you’re debt free. After you’ve implemented a strategy, be careful not to add to your debt by continuing to use credit cards, or make unnecessary purchases. Hide your credit cards in a drawer, use your debit card and pledge to only spend money that you have on hand. Do whatever it takes to not add to the amount of money you already owe.
The more debt you pay off, the more financial power you’ll regain for yourself and the closer you’ll be to true financial freedom.