Declaration of Being Debt-free
We’ve heard the term financial independence thrown around as a goal one should strive for when creating a financial plan. But what does that really mean? While everyone has their own spin on the term, generally speaking it means that you attain a level of wealth when you can cover your expenses without having to work actively for it – that is, your assets generate enough income over the long-term to sustain your lifestyle.
I’d also add to that true financial independence means that you are debt-free, or that you can cover those outstanding obligations fully in the process. While certainly there is some debt that is “better” to hold than others – as a general rule of thumb, mortgage loans, for example, are considered acceptable to hold versus significant credit card debt – strictly speaking whenever you are indebted to another party, it is hard to consider yourself “financially independent” if you are in a position where you cannot easily pay back that party with the assets you currently own.
As we celebrate this nation’s independence, it’s no surprise to note that the majority of people in this country are not financial independent, and certainly not debt-free. A recent New York Times article reported on how America’s household debt is increasing: http://nyti.ms/2sEn21L
This is not great news, for our nation nor for ourselves as individuals.
However, if we reach back into our history books, let’s also remember that our Declaration of Independence occurred in 1776 but our actual triumph over the British in the revolution occurred in 1783, seven years later! The Declaration was our intent, our ideals and goals for our nation that was yet to be formed.
It was just the beginning.
In a similar vein, you can create your own Declaration to become debt-free and financially independent, knowing that the actually manifestation of those ideals may take months or years to achieve.
In becoming debt-free and on the road to your own financial independence, here are three important reminders:
Crunch the numbers – Like Thomas Jefferson, you may start off with a written “declaration” of what you want to achieve, but to accomplish your goals, it’s not enough to simply state that you want to “crush your debt.” Use a debt calculator where you list all of your debts, along with the current balances, minimum payments and interest rates that will help you figure out which debts to start paying off first and what additional payments you need to make regularly (usually starting with the “bad debt” first, such as credit card loans, then student loans, and tackling mortgage last).
The best calculators will show not only a payment schedule and time line for payoff, but will also allow you to experiment with varying payments and order of debts.I often use https://www.vertex42.com/Calculators/debt-reduction-calculator.html but there are plenty of others online.
In paying off debt, the two most common strategies are 1) paying off the debt with the highest interest rate, thus saving the most in interest payments over time or 2) paying the debt with the smallest balance, which allows you to stay motivated as that individual debt is paid off sooner, allowing you to then direct those previous payments to the next debt (often called the “snowball” method).
It’s vital to do some number crunching and not simply throw extra money toward your debts haphazardly without a clear plan.
Identify your compelling reason – Because debt pay off can often seem like a marathon and not a sprint due to the time frame involved, it important to identify specific reasons why you want to be “debt-free.” For some, being “debt-free” is reason enough to keep them motivated. Others, however, need a goal that seems more concrete associated with it, such as being debt-free means “I no longer have to work in my soul-sucking job” or “I can give back to my family or community by helping them fund something that they need” or “I can finally travel guilt-free.”
Another related tip is to create mini-goals or intermediary goals. While your ultimate goal may be to pay down $10,000 worth of credit card debt and $25,000” in student loan debt, your mini-goal may be to increase your payments toward them by 10% each month for a few months (so, for example, a $100 payment one month increases to $110, then $121, then $133).
Start now – Often I work with clients to create a debt re-payment and they are really motivated . . . to start next month. They say everything sounds great, except they can’t start right away because they have a wedding to attend or it’s the holidays or they’re too busy at work to track their spending, etc.
The truth it, it’s never a good time and there will always be an excuse, sometimes a really good one. But imagine if Jefferson and the Founding Fathers had waited another year, or two or three? As the annals of history have revealed to us, sacrifices sometimes have to be made to achieve the ideals of democratic freedoms; what followed the Declaration were years of hard-fought battles, thoughtful and often heated debates on the formation of our new government, and difficult compromises that required a new level faith and vision.
What trade-offs are you willing to make to achieve your own financial independence?
Happy 4th of July!