In his essay on wealth, Ralph Waldo Emerson writes that “a man in debt is so far a slave.” Since debt is sometimes a necessary tool to help us purchase something essential, we don’t often think about it in those terms. How many new homeowners, for instance, feel shackled as they walk through the doors of their home? No matter the purpose of the debt we acquire, however, the sentiment Emerson expresses still holds some value—all debt limits our financial flexibility. Not only do we end up paying more than the original value of our purchases, but we also lose the opportunity of investing the money we must use to pay interest on our debts.
If you’re trapped in debt, here are some ideas to help you end the cycle and regain your financial freedom:
Focus on Interest Rate
With most goals in life, having a plan can help you stay on the path toward success; taking a strategic approach to getting out of debt is no different. Once you pay the monthly minimum on each of your loans, focus any extra money on the debt with the highest interest rate. Once you pay that debt off, put that extra money toward the debt with the next highest, and so on. This will allow you to pay less interest and get out of debt faster.
Consider Debt Consolidation
If you have multiple payments each month or have loans with high interest rates, talk to your credit card company, your bank or your financial advisor about available options for consolidating them into one loan. Depending on your credit score, you might be able to drastically reduce your interest rate. But, if you choose to consolidate your debts into one payment, be sure to continue paying the same amount each month—even if your minimum payment is lower. Remember, debt consolidation is a tool to help you get out of debt, not to prolong it.
Save for the Future
When unexpected events come up, like trips to the hospital or costly vehicle maintenance, staying debt free can get more difficult. It’s easy, and sometimes necessary, to put those expenses on a credit card. But in the long run, that will add to your debt and prolong your financial freedom. Building up savings in anticipation of these unexpected expenses will give you a cushion that allows you to avoid taking on high-interest debt.
One more thing: once you’ve succeeded in paying off all of your high-interest debt, take the next step toward a more secure financial future by redirecting those monthly dollars to an investment that provides you with the opportunity to grow your money. A financial advisor can help you determine the right investment for your particular situation and goals.