For me, financial freedom is really all about that one word: Freedom. The freedom to choose. The freedom to change. The blissful state of not being trapped by financial obligations.
And nothing spells trapped by financial obligations like debt.
What’s my problem, anyway? Everyone has debt. It’s normal to have debt. We need debt to have the things we want.
At least, that’s what lenders want you to think. And they’re not entirely wrong. According To Equifax’s September 5, 2017 press release, the average Canadian has $22,595 in debt – up 3.3% since last year. Note that this figure excludes mortgages.
You might be thinking to yourself, that’s not that bad. After all, you’d be lucky to pay $22,595 for a new subcompact car. But remember, that’s the average. So it includes all the people out there who don’t have any debt (they do exist, promise). So the reality is that a lot of Canadians are carrying even higher debt loads.
I basically have two mains problems with debt.
The first is that it costs money. I’m not just talking about the fact that it’s a bill, although that does suck. I’m talking about the fact that when you borrow money, you are paying for a service. You’re paying to access money that you think you need, because you don’t have it yourself.
Stop and think about that. You didn’t have the money to buy item X, but you have the money to make a monthly loan payment, plus interest. When you finance something, you end up paying more than the item was worth. And I hate wasting money.
My second issue is that debt boxes you in. Bills are part of life, but I don’t want to owe out half my pay cheque. When you get into the position of owing a substantial portion of your pay cheque to debt payments, it’s like you’re trapped. Your cash flow is reduced, so you don’t have the freedom to choose how to spend your money – you’ve already spent it, before you even earned it. If you become unhappy at work, you can’t take a lower paying job, because you need the money to finance your debts.
The worst part about it is that a lot of the time, the thing you’re financing loses a lot of its appeal in a short amount of time, while the loan hangs around, draining your resources. You know what I’m talking about. Sometimes we’re so excited to get certain things that we don’t remember that the novelty will inevitably wear off.
The good, the bad, and the ugly
To be honest, I don’t think any debt is good.
Yes, I have a modest mortgage. I hate that even though I’m paying extra on it and working to become mortgage free as fast as possible, I’m still giving the bank thousands of dollars in interest. But I guess it beats giving thousands of dollars to a landlord.
All debt is bad, but some debts are worse than others. A modest mortgage may be a smart move, depending on your situation and the real estate/rental market where you live.
A student loan makes life as a new grad exponentially more difficult, but it might have been a necessary evil in securing the training you needed for your career.
I cringe at the thought of a car loan. New cars depreciate the moment you drive them off the lot, and used car interest is often pretty steep. If you can afford a car payment, you can afford to save up for a car. But maybe your work or family situation necessitates that you have a car, and you got stuck in a situation where you had to replace yours quickly. I can see it.
But worst in the pack is credit card debt. Credit card debt is evil, guys. It typically comes in around 20% annually, and if you’ve ever carried a balance, you know what a kick in the face it can be.
Don’t get me wrong – I love credit cards. I use them exclusively for my day-to-day transactions and my recurring bill payments. I’m obsessed with credit card rewards, and I’ve taken some pretty amazing trips on the points I earn. But I never, ever pay credit card interest. I’d rather eat instant noodles for a month than pay Visa a cent in interest (either would feel terrible).
When you are unable to pay your credit card balance off in full by the statement due date, an interest charge is added to your next bill. The result is that when you make a payment, only a portion of your payment is going towards paying down your actual balance – the rest is going towards interest.
Imagine you are carrying a balance of $2000. You make a $200 payment. If you annual interest rate is 19.99%, then that $200 payment is only worth $167 against your $2000 balance. The other $33 went to interest. This is why once you rack up a large credit card bill that you can’t pay back, it’s so hard to get out from under it. You can be making payment upon payment, but so much of it is going towards interest that it takes a long time to get back on your feet.
Don’t do it. Trust me, it’s not worth it. My best advice when it comes to credit cards is that if you’re not confident that you will be able to pay your balance owing in full every month, then it is best for you not to use them until you’ve mastered budgeting (future post pending).
I don’t want to leave you in despair here. Maybe you’re just starting to learn about this money management stuff, and you’ve already accumulated some debt. Guess what? A lot of people who are great with money learned the hard way, so don’t beat yourself up. I know I’ve made some financial mistakes in the past. The important thing is that you’re trying to educate yourself and make a change.
I’m not going to lie, getting out from under debt is not easy, but it’s doable. If you’re committed to making some key behavioural changes, you can change the trajectory of your financial life. Stay tuned for a future post on how to tackle debt.
It can be hard to resist debt. We want things, we want them now, and the temptation is real. Sometimes we need things, and that’s real, too. I get it. But if you want financial freedom, debt is your enemy. Stay strong!
Do you struggle to resist debt? What are some of your best practices for avoiding getting sucked in? I’d love to hear from you!