Bright Futures Await Declarations of Financial Freedom
The steps you can take now to declare your financial freedom
Financial independence is wishful thinking for most people. Living paycheck to paycheck compounded by national financial calamities seemingly arriving like clockwork decade after decade — each worse than the one gone before — offer the average person little prospect for relief.
While not an immediate cure-all, financial experts Ryan Derousseau and Tara Mastroeni bring a message of hope. They believe that even in bleak times, there is an escape for those determined to set themselves free.
Derousseau is a freelance writer, journalist and author. Mastroeni is a freelance real estate and personal finance writer. The consumer credit reporting company, Experian, brought them together to talk about ways to break free from debt and become financially independent.
Getting finances organized is a first step. Experian recommends setting up auto-pay to cover the minimum payment due on all credit cards. That way, those who forget a bill won’t face penalties.
“I use an online budgeting or financial management tool,” Derousseau said. “That way you can see your spending, debt and savings all in one place.”
This could take trial and error, but it’s critical to find a system that works for each person.
“Yes, it’s very true,” Derousseau said. “There’s no one answer here. It’s about what you will keep doing month in, month out. Automate everything you can. Automate debt repayment, automate investing and so on.”
Fallacy of Wishful Thinking
Antoine de Saint-Exupéry, the poet and the author of The Little Prince, famously said, “A goal without a plan is just a wish.”
“Set financial goals,” Mastroeni said. “Before you can organize your finances, it’s crucial to know what you want to accomplish. Whether you want to pay down your debts, build up an emergency fund or save up for a down payment, having a concrete goal will help you stay focused.
“Track your spending,” she said. “The next step toward organizing your finances is figuring out where your money is going. There are many apps that can help with this. You’ll want to track your spending for a month or two to get a sense of your consistent spending habits.”
That leads to creating an income and expense plan.
“Once you have an idea of your spending habits, use them to create a budget,” Mastroeni said. “Do your best to stick to it, but feel free to make tweaks as needed. Don’t forget to also make room for your financial goals in the budget as well.”
While it’s generally recommended to first pay down high-interest, debt, Experian states that the right strategy can depend on each person’s situation. The company’s blog suggests which credit cards to pay off first.
“It’s also important to know yourself,” Derousseau said. “If you know you can stick to the plan, take the high-interest debt out first. If you aren’t sure about the process or are new to the idea of paying down your debt, then maybe the snowball method is a better place to start.”
Comprehensive Planning is All Downhill
Mastroeni described how small snowballs build up relatively fast.
“With the avalanche method, you pay off the debt with the highest interest rate first,” she said. “Using this method will save you money in the long run because you’ll spend less money on interest charges over time.
“Alternatively, you can use the snowball method and pay off your smallest debts first,” Mastroeni said. “This gives you a series of small wins at the beginning of your journey, which may give you more motivation to keep going, even as your debts get bigger.”
Creating a budget might be the easiest part of budgeting, according to Experian. Keeping track of and limiting expenses month after month is usually the hard part. For that, the Experian blog has tips for sticking to a budget.
“I hate to repeat myself, but it’s automation,” Derousseau said. “The more you can set and forget it, the less chance you have of letting immediate concerns outweigh your debt repayment.
“I’d also add, take ownership of the situation,” he said. “Enjoy the process. If you have a high debt load, it’s exciting when you see those numbers decrease. Turn it into a game, celebrate it, and let the falling numbers motivate you.”
Budgets do not create themselves. The best plans take forethought.
“Track your spending before making your budget,” Mastroeni said. “Having a good idea of where your money is going every month will help you keep your budgeting categories realistic. The more realistic they are, the more likely it is that you will stick to them.
“Don’t be afraid to make changes as needed,” she said. “If you find yourself over spending — or having money leftover — in a particular category every month, it’s OK to make changes to your budget to make it more user-friendly for you.”
Addressing the Envelope
There are a variety of ways to manage expenses.
“Use the envelope system,” Mastroeni said. “If a digital spreadsheet gives you too much wiggle room, the envelope system allocates cash in an envelope for each spending category. Having a finite limit to the amount of cash available to you may help you stay on track.”
Earning extra cash can help eliminate debt faster. Even if there is barely enough to make a little extra here and there, that can make a big difference in the long run. The Experian blog has ideas to get started on earning extra income.
“You could also negotiate a raise at work,” Derousseau said. “If you can get paid more for doing the same amount of work, that’s the best of both worlds.”
Short of that, Mastroeni would look at a side hustle.
“Getting a part-time job will guarantee you a second paycheck that can be put toward paying down your debt,” she said. “Lots of skills are marketable these days. Everything from becoming an Uber driver, to freelance writing or opening up your own Etsy e-commerce store can become a side hustle.”
Experian’s blog also has tips on how to plan for and effectively negotiate a lower credit card interest rate and what rates to aim for.
“If the reason you’re dealing with growing debt is because of pandemic job loss, let your credit card company know,” Derousseau said. “Most of them have ways they can help right now.”
How Much Can You Really Pay?
Before calling their credit card companies, consumers should figure out what they can realistically spend.
“Know how much you can afford to put toward your debt right now,” Mastroeni said. “That way, you’ll have a figure in mind, and you won’t end up with a plan that you cannot really afford.
“Don’t be afraid to negotiate,” she said. “Most credit card companies realize that being repaid for some of the debt is better than none and are willing to reach an agreement. Keep negotiating until you land on a repayment plan that will truly work for you.”
A verbal agreement is worthless.
“Get it in writing,” Mastroeni said. “When you’re done negotiating, ask to receive all the details in writing. That way, you’ll have proof in case anyone tries to question your agreement.”
Whether to save or pay off debt depends on factors such as the interest rates on debt and whether the person has emergency savings. The Experian blog suggests how to decide when it makes sense to pay off debt before saving money and vice versa.
“Ideally, you’re doing both at the same time,” Derousseau said. “If you have credit card debt and zero emergency savings, you don’t want to go into more debt simply because an emergency happens.
“Pay the minimum on the credit card, and build a couple months of expenses in emergency savings,” he said. “After that, pump everything into the credit card debt repayment before bolstering your emergency savings further.”
Mastroeni generally agreed.
“Pay down your debt first, and then save for emergencies,” she said. “If you try to save first, you’ll end up paying more in interest charges over time.”
Keeping track of progress will stoke motivation. The Experian blog has tips to pay down credit cards on a tight budget.
“Use a debt tracker app,” Derousseau said. “There are lots of free apps out there that will help you keep track of your payments and how much you owe. Some will even help you analyze your total debt to figure out the best repayment method.”
For Those Who Prefer to See all the Numbers …
There are also debt tracker spreadsheets.
“If you don’t like the idea of putting your financial information into an app, you can also find debt tracker spreadsheet templates online and track your payments that way,” Mastroeni said.
For some people, paying off a loan might increase their scores or have no effect at all, according to Experian. It all depends on a person’s overall credit profile and the type of credit score they’re checking. The company’s blog has more about credit scoring factors.
“Paying down your debt will ultimately improve your credit score,” Mastroeni said. “Credit bureaus track the total amount of debt that you owe. It accounts for about 30 percent of your credit score. The lower your amount of debt is, the higher your credit score will be.”
The Experian blog features steps to help get out of debt and remain debt free in the future, plus build good credit for the long haul.
Experian stated that “there’s a persistent misconception that carrying a credit card balance from month to month can help you improve your credit score. That’s simply not true. Paying your balance in full will not harm your credit score, and carrying a balance typically means you pay interest charges.”
Derousseau dug deeper into money-management fundamentals.
“There’s a budgeting technique that goes by ‘zero-based budgeting’ or ‘spend what you earn’ budgeting,” he said. “It calls for spending or saving every cent — and no more or less — that you made the month prior. If you’re only using what you earn, you won’t go into debt. Also pay off your credit card in its entirety every month.”
Dangers of Getting Caught Off Guard
Unexpected expenses lurk around every corner.
“Once you’re able, building an emergency fund will give you extra money to fall back on in the event that unforeseen expenses come up,” Mastroeni said. “I wrote about how to build an emergency fund for Business Insider.
“Setting a budget and sticking to it is the best way to ensure that you don’t spend more than you’re bringing in every month,” she said.
Achieving financial freedom means a person can comfortably afford not only necessities, but also achieves goals and experiences that make money feel like a tool, not a restriction, as described in Experian’s blog.
“You can’t reach financial independence if you have consumer debt — ignoring mortgages,” Derousseau said. “It’s the antithesis to independence because you’re paying interest instead of on things you want. If you have debt, make a plan for it. You’ll be surprised how fast you can pay most of it back.
“Make it into a game,” he said. “It sounds strange, but as you pay down more debt, the more motivated and excited you’ll get about the process.”
An overall approach is much better than going about finances piecemeal.
“Consider consolidating your debt,” Mastroeni said. “If paying multiple interest fees is adding up, consolidate your debt with a debt-consolidation loan or balance-transfer credit card. They will allow you to combine all your debts into one balance and one monthly payment.
“The National Foundation for Credit Counseling offers nonprofit debt counseling and debt-management plans,” she said.
For more help managing debt, the NFCC offers a wide range of services.
About The Author
Jim Katzaman is a manager at Largo Financial Services and worked in public affairs for the Air Force and federal government. You can connect with him on Twitter, Facebook and LinkedIn.
