Written by: Raki
I’ve been on this journey for a while. It’s hard to believe that I’ve been in debt to someone for nearly 20 years. And I’m not even talking about a mortgage. Student loans, credit cards, auto loans, and more, I’ve had it.
In those 20 years, I have learned a LOT. In search of financial freedom, here are five things I’ve learned so far.
It’s easier to avoid debt than go back and repay it.
My relationship with debt began in 1996, my freshman year of college, with a free t-shirt from American Express and a $500 credit limit. Almost 20 years later, I still have hefty student loans, payments on financed purchases, and lingering debt from things long-gone. I guess I never really got the concept of paying cash or using credit responsibly.
Being in debt feels overwhelming, suffocating, discouraging, and sometimes hopeless. I compare it to nearly drowning in the ocean. Imagine that you are swimming, but have become overwhelmed by the waves, the water suffocates the oxygen out of your body, the tide gets stronger, and there is no help in sight. That’s how being in debt feels. As the Bible says in Proverbs 22:7, ‘the borrower is slave to the lender.’
I should have been letting compound interest work for me instead of against me.
Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. A loan, for example, may have its interest compounded monthly: in this case, an account with $1000 initial balance and 20% interest per year would have interest of $16.67 and balance of $1,016.67 at the end of the first month. If you pay it off in one year, you will have paid $108.86 in interest. Can’t tell you how many accounts I’ve paid interest on.
A savings account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal, $25 monthly deposits, and 1% interest per year would have a balance of $1,311.42 at the end of the first year, earning $11.42 in interest. I would rather earn $11.42 in interest than pay $108.86 in interest.
You can always make more money, but you can’t get back time.
Just like compound interest grows over time (in your favor or against you), time is gone. Thankfully, if I am in debt, I can work my way out of it. I just can’t go back and retrieve the 20 years I’ve spent being stressed out, overworked, worried, etc. So, I’ve decided to still enjoy myself while digging myself out of debt.
I have to take ownership, responsibility, and control of my financial freedom.
By nature, I am very thrifty. Yet, I have a large debt I’m trying to pay off. With a busy family and even busier work schedule, I can easily get sucked into spending too much on conveniences and allow expenses to increase each month without much thought. By going through the $1000 Challenge, I am consciously reviewing my monthly spending to find more funds to allocate to this debt.
An emergency fund is essential.
Rainy days are a lot easier to deal with when you have an emergency fund and a small number of debts sucking up your monthly income.
Let’s face facts. Rainy days will come. Cars break down. You’ll have unexpected medical expenses. At the end of the day, we’re not perfect. We can’t predict everything that could possibly happen to us. But car repairs are certainly a lot easier to swallow when there are funds set aside for them. I can create the funds I need in that emergency fund if every dollar I make isn’t already accounted for and scheduled to be paid to a creditor.
I hope you’ll find these tips helpful and keep them in mind as you plan how you will handle your finances: avoid debt, let compound interest work in your favor, enjoy your life anyway, take responsibility, and be prepared for rainy days.