Debt freedom

Feel like your shelling out so much money each month on interest to repay a loan?

‘Debt is when you owe money to someone and is whilst you are making payments to someone you are not free!’

Being stuck in the debt trap can affect our mental and physical health and often puts unhealthy pressure on our relationships.  One of the number one causes of household arguments and unfortunately divorce and separation is around financial problems. Good debt is a useful financial tool, helping you to do things that will improve your finances in the long run – such as going to college, buying a home, or building a business.

On the flip side, bad debt, such as credit cards introduces interest payments while creating a liability. when you become dependent on borrowing to get month to month, the trap begins and you enter an endless cycle of debt.

Ok, so what is the good news?

The first taste of financial freedom and the secret to financial success is to start paying off debt!

Debt has become common place is most households and keeps us in the rate race, constantly looking to increase our income to meet our ever growing expenses.

Start with calculating your net worth “The euro amount of your assets minus all your debts”.

To understand this subtract your liabilities (debts) from your assets. If your assets exceed your liabilities, you will have a positive net worth.”

We accumulate many types of debt we as we go through the cycle of life

(Student debt, credit cards, overdrafts, personal loans, pay day loans, car loans, leasing, tax, mortgage)

Debt can be secured or unsecured debt.

Secured debt requires some kind of collateral that could essentially be taken from you in the event that the debt was not repayable according to the terms it was provided. Unsecured debt is generally granted on your credit worthiness.

Step 1 Decide to get out of debt!

Step 2 Ring all the debtors, ask for (current balance, interest rate, if it can be frozen or reduced, total cost of credit, final payment date, account number, settle figure to clear today, early exit penalty, can you make overpayments)

Step 3 I have created a FREE cash flow budget tool in google docs which will help you establish your income and outgoings. You can list all debts as expenses and figure out how much extra you have monthly to throw at them Click here

Step 4 Use a debt management charity or service (they will liaise on your behalf, manage your debtors with a single payment from you, and act as a buffer demonstrating your proactiveness).

Step 5 Keep a modest emergency fund

Step 6 Throw everything you have at the debt

Strategy 1 Snowball method is to pay minimum balance on all debt and pay off smallest debt first

Strategy 2 Pay off the most expensive debt first

*If you want a psychological boost just pay the smallest debt off first and then tackle the next one and you will enjoy crossing the debt names off your list!*

Tips when tackling debt:

  • Make a game plan
  • Take advantage of balance transfers (credit cards offer up to 12 month interest free)
  • Reduce spending and live like a student until your free!
  • Put all work bonus towards debt
  • Get a second job
  • Sell household items and clutter
  • Buy a car for cash (5 year old cars depreciate slower)
  • Examine your bills
  • Request your credit report
  • Get your partner on board

Irish credit cards providers give up to 56 days’ interest-free credit on purchases. This means you can avoid paying any interest if you pay off your balance in full and on time each month.

As an example let’s say you go over the 56 days you could be paying 22.9% interest on the balance due. If you are in this position I would suggest looking to get an interest free balance transfer with another credti card provider (sometimes up to 12 months) and then you only have the yearly government stamp duty (30 euro per year at the time of this blog post).

Do you have a car repayment? Is it affecting your ability to get a mortgage? Do you feel like your drowning?

You will often see secret millionaires and people on the fire journey driving a car they paid cash for. The average new car will have a residual value of around 40% of its new price after three years or in other words will have lost around 60% of its value at an average of 20% per year. Buying a five–year–old car may be the sweet spot. You won’t get the latest features, but it won’t lose so much in value.

Step 7 Decide if you want to be mortgage free or move to step 7 ‘Investing’.

This is a very personal decision. Logically if you can borrow at 4% and get a yield of 8% why not just do this all day long. The largest study of millionaires conducted in the US by Ramsey Solutions studied key data points and found the typical millionaire pays off their home in 10.2 years, making this an essential part of their net worth. Some people argue that the grass in the garden just feels so much better when you know its all yours. I have heard some people talk about the moment they write to their bank instructing them to release the house title deeds to them. Your choice!

Step 8 Debt freedom – Start Investing!

By step 6 you will have embraced some level of frugality and became intentional with your spending, it should now feel like you are moving at a nicer pace and less of a sprint. All that extra money you have been throwing at debt consistently can now be allocated to investing.

To summarise financial freedom leads to increased savings, That’s right, a debtfree lifestyle makes it easier to save! There is the instant relief from anxiety and the joy of having less bills. From a FIRE perspective, funding your dreams gets a whole lot easier when you have no debt. With the increased Financial Security you can start to have more fun and start designing life on your own terms 🙂

If you liked this blog post please add a comment.

Get in touch if you want to explore this further and schedule your FREE 30 minute chat with me Click here

This Post Has 2 Comments

  1. Thomas

    Great post. Getting debt free is the first step in the journey to freedom. Well done on getting into the logic behind mortgage debt.

    1. daveg

      Thanks Thomas. Sometimes simply getting back to zero is the hardest part.

Leave a Reply