How Debt Destroys Your Chances for Financial Freedom

Happy Wednesday, friends! Today’s guest post is from Josh, who blogs over at Money Buffalo. Enjoy!

Let’s face it, you are most likely part of the 80% of the American population that is currently making a monthly loan payment. Between student loans, a home mortgage, car loans, and the exercise machine you bought on sale in January, it can be nearly impossible to not borrow money at some point in your life. While going into debt is often viewed a normal facet of life, most people do not realize how debt can destroy your chances of financial freedom and living the life you truly desire.

Debt Has Hidden Costs

What you might not realize about debt is that it’s more expensive than you think. This is because banks charge interest and the first portion of your monthly payment is applied to the interest payments and the remaining balance reduces the original amount you borrowed. It’s what causes your original $100,000 house to actually cost $130,000 or your $30,000 car to cost $32,000 when the loans are finally paid off.

If you could have made those purchase with cash, that additional money could have been spent on future expenses like vacation, Christmas, or saving for retirement. Instead, it’s “free money” given to the lender because you didn’t have enough of your own money. With each new loan, a larger portion of your salary needs to be set aside for to pay back the original purchase and also give the bank the monthly accrued interest.

Do You Live For Today?

Being in debt causes you to live for today as your primary goal each month can easily become having enough money in the bank account each month to make the monthly loan payment instead of saving for the future. Depending on how much your monthly loan payment is, you have to make certain sacrifices to afford the monthly payment or you slip even further into debt.

These sacrifices may include working a time-intensive job that has a good salary but a horrible quality of life causing you to feel “trapped” because you can’t afford to quit. You may also have to delay future purchases like buying a larger home to accommodate your growing family because your current debt-to-income ratio disqualifies you from getting a new mortgage.

Debt Isn’t the American Dream

Norman Rockwell’s Americana paintings portray the lives many of us dream of having: a house of our own, a happy family, and the ability to enjoy a peaceful lifestyle reminiscent of the 1950s. His paintings don’t convey a hidden message beneath the surface that the “perfect life” is really living paycheck to paycheck, hoping there is enough money in the bank to pay the electric bill, buy groceries, and still have enough money left over to make the credit card payment.

We happen to live at a time in history when almost any of us can afford practically anything, not just the millionaires and billionaires. We can tour the world, go to Disney every year, and buy luxury vehicles provided we have access to credit & promise to repay the balance later or pay upfront with cash.

Whose life are you living? Love Your Life, Not Theirs: 7 Money Habits for Living the Life You Want

For some, the “American Dream” has become an “American Nightmare” because they have overextended themselves financially and don’t know how to change course. Most of the friends or family might live similar lifestyles and think they must as well. Financial freedom is nowhere to be found as the prevailing thought is to simply bounce from one monthly payment to another.

What Financial Freedom Looks Like

Financial freedom means something different to everybody. For starters, it means being able to live for tomorrow and escape the paycheck to paycheck lifestyle and no longer stress about making enough money to pay the bills.

For you, financial freedom might mean being debt-free and using the money that previously went to loan payments to be put towards your love of traveling to exotic places without racking up the credit card debt.

It could also mean the opportunity to make extra contributions to your IRA and 401k so you can retire early, pay for your child’s college education and still contribute to your retirement contributions, or, in my case, switching to a family-friendly career because I no longer needed to work 70 hours to make ends meet at my old job.

Your path to debt freedom: The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

 How You Can Achieve Financial Freedom

If you are currently in debt, whether it’s credit cards, student loans, a mortgage, or a combination of loans, the first thing you need to do is think optimistically. Instead of fearing tomorrow & hoping you will have enough money to pay the bills, follow these action steps to chart your course to financial freedom.

Step #1: Make a List of Your Short-Term & Long-Term Financial & Personal Goals

Financial freedom may appear to solely focus on money, but, it also includes your personal goals because money isn’t the sole solution to every question & problem in life.

Jot down some short-term and long-term goals. Short-term goals can include making more than the minimum payment on your loans to become debt-free sooner, saving $50 a month to pay for the next summer vacation. Long-term goals can include buying a vacation home, having $2,000,000 in the bank to retire at age 55, or paying for your child’s college education.

Step #2: Analyze Your Spending

Next, compare your current spending to your goals. Can you accomplish your short-term & long-term goals with your current spending habits? If so, great!

If not, see where you can trim expenses and make smart money decisions. A few ways to cut spending is to bring a lunch to work, not buy a new vehicle every 3 years, and even putting the first portion of your paycheck in savings before you even start paying the monthly bills.

Step #3: Attack Your Debt

Before you can fully start living for tomorrow, you need to pay for the past. Make a list of all your loans and attack the most expensive ones first like credit cards that can have an interest rate near 20% since they will accrue interest quicker than your home mortgage with a significantly lower interest rate.

Make more than the minimum payment on at least one of your debts to pay it off even quicker. If you need some additional debt payoff motivation, reading personal finance blogs or books from financial gurus like Dave Ramsey will provide the additional resources you need.

Step #4: Save for Large Purchases

For your future purchases, try to save as much as possible so you don’t have to borrow more money and erase all the progress you just made. Saving for 30 years to buy a new house might be impractical, but, saving enough to meet the 20% down payment requirement to opt-out of private mortgage insurance is a good idea.

When it comes to buying a car, can you buy a used vehicle with cash that is still mechanically sound & has low miles instead of the family SUV that has a sticker price of $59,988 and requires a 5-year loan just to afford the payments?

The hidden secret about saving money: The Wealthy Barber, Updated 3rd Edition: Everyone’s Commonsense Guide to Becoming Financially Independent

You Can Accomplish Financial Freedom

By making small financial sacrifices now, you may no longer have the flashiest car or the latest gadget, but, you will be able to accomplish financial freedom sooner and be able to live the life you want later without stressing over the monthly payments. It might not be easy in the beginning, especially if you are accustomed to borrowing on a whim, but, after seeing how your bank account can grow by being intentional about saving and waiting to make large purchases will make achieving financial freedom feel very realistic.

 

About the Author: Josh writes about personal finance at his blog, Money Buffalo to help tell others how he was able to repay $70,000 of debt in 5 years and change careers to spend more time with his family through financial freedom. While he & his wife currently have a mortgage, they are striving to pay it off as early as possible and plan to never be in debt again!

 

10 comments

  1. I’m shocked that the figure is only 80% of Americans making monthly loan payments. I figured it would be closer to 90% or more! The road to financial independence isn’t easy, but it’s been really rewarding for us. Even though we’re still in debt, our finances are in much better shape than they were two years ago. It’s worth it, y’all!

    • Josh says:

      I thought the stats would have been higher as well. As you said, the road to financial independence is worth it, even it’s not always comfortable.

  2. Brian says:

    I didn’t realize that 80% of the American population is currently making a monthly loan payment. That’s frightening. A big part of overcoming our debt and breaking the cycle of living beyond our means is a mindset change. Thanks for the tips Josh. We need to continue to share the information for those in need of help.

    • Josh says:

      Thank you Brian. My wife & I talk about how a nationwide mindset change toward spending would alter life. The economy would probably suffer for a few years since we are so geared on consumer spending, but, overall, I think life would be much better because of less debt once the transition was over.

  3. Thanks Josh for the great post – I completely agree, DEBT SUCKS.

    Like you alluded to above, financial freedom is the combination of cutting expenses and building passive income. If you have to spend money each month to pay down your debt, you won’t be improving either side of the equation.

    Have a good one – Erik

    • Josh says:

      Cutting expenses only goes so far. Our current budget is about as low as we can get so we’re not in a position to borrow much more at the moment and still be able to save. As a result, we are taking care of what we do own to make it last longer & saving/waiting for a good deal for our future purchases to keep us from taking out a new loan.

  4. With the average American car payment right around $500/month – imagine how much wealth could be built if instead that same amount went toward retirement (or any other big financial goal, like children’s college funds). It’s a bit mind-blowing when you play with the numbers.

  5. It is amazing how our culture has evolved into immediate gratification. My parents were “old school.” Saving for almost everything (except the house and one car). I know that my parents had credit cards, but they always paid the balance every month. My mother was a stay at home mom, but she did from time to time go to work in order to save for something special.

    My husband and I have lived our lives pretty much the same way. We still have a mortgage and a very small car loan, but in 5 or less years we will be completely debt free.

  6. I definitely agree that once you’re out of debt that it’s addicting to when you see your net worth increase. At times it feels like it explodes up which is a really nice feeling 🙂

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