Blog

As a licensed wealth advisor, I have seen the severe impact debt has on individuals and families, especially in underserved communities. It’s about more than just numbers on a balance sheet; it’s a burden that can stifle dreams, limit opportunities, and perpetuate cycles of financial difficulty. But I’ve also seen the transformative power and positive financial change that overcoming debt brings, and I believe that everyone, regardless of their background or current circumstances, has the potential to achieve financial freedom. Let’s discuss how!

Understanding the debt dilemma

Debt can be a complex and emotionally charged problem, often stemming from a combination of unplanned circumstances, systemic inequalities, uninformed financial missteps and unexpected life events. In today’s world, debt has become a daily part of life for many and often has a variety of causes:

• Student loans: The goal of improving life prospects through education often comes at a high cost and leaves graduates with student loan debt.
• Credit card debt: The allure of the “buy now, pay later” trend can lead to credit card balances piling up with high interest rates.
• Mortgages: Although owning a home is a dream for many, mortgages represent a significant financial commitment.
• Car loans: Financing a vehicle can be convenient for the buyer, but it also increases the overall debt burden.
• Medical bills: Unexpected medical expenses can quickly lead to significant debt, especially for those without adequate insurance coverage.

It’s normal to feel overwhelmed, ashamed, or hopeless when faced with mounting bills and seemingly endless bank balances. This is where a conscious shift in perspective can be incredibly helpful. Instead of viewing debt as a personal failure, it’s important to view it as a challenge to be overcome, a temporary detour on your path to financial growth.

The power of knowledge and empowerment

Knowledge is your most powerful weapon in the fight against debt. It’s important to understand the different types of debt, their interest rates, and their long-term impact on your financial health. Equipping yourself with financial literacy will help you make informed decisions, negotiate with creditors, and develop a personalized debt management plan tailored to your specific circumstances and goals.

Know your numbers by creating a budget and getting in the habit of knowing where your money goes each month. Your four buckets that your money usually goes into are taxes, needs, wants and savings. By listing your mandatory expenses (needs) as well as your discretionary expenses (wants), you can develop a plan that eliminates your temporary debt to improve your spending on both wants and savings. After you’ve done the homework to create the budget, create a detailed breakdown of your debts, their payment dates and their interest rates.

Knowing yourself is just as important as knowing the numbers. It’s important to know that debt is usually not just a financial problem, but a psychological one as well. The stress and anxiety of owing money can cloud judgment, lead to poor decisions, and even contribute to mental health issues. Support from friends, family, a financial advisor, or support groups can help manage these emotions and develop a positive mindset. Remember, you are not the first and you won’t be the last, and you are not alone on this journey, and there are resources to help you along the way.

3 strategies for managing debt

There are three main strategies for dealing with debt: consolidation, snowballing, and avalanche. Each method is based on different psychological motivations and may be more effective for certain personality types.

• Debt consolidation: This strategy involves consolidating multiple debts into a single loan with a lower interest rate. This simplifies your payments and potentially reduces the total interest you pay over time. Debt consolidation can be a good option for people with multiple debts who have trouble keeping track of their payments or who want to simplify their debt management process. However, it’s important to choose a consolidation loan with a lower interest rate than your existing debts, otherwise you may end up paying more interest in the long run.
• The snowball method: This approach focuses on paying off the smallest debts first, regardless of interest rates. With each debt, no matter how small, people gain a sense of empowerment and accomplishment, which can be very motivating for those who accumulate successes and positive reinforcement. This method is especially effective for individuals who feel overwhelmed by debt and appreciate experiencing tangible progress to stay motivated.
• The avalanche method: This strategy pays off the debt with the highest interest rates first. While it will take longer to see progress, this method mathematically saves you the most money in interest payments over time. The avalanche method works well for analytical individuals who are motivated by the logic and efficiency of the calculated returns that come from paying off high-interest debt each month.

Although many believe that choosing a method to pay off debt should be purely mathematical, an experienced financial advisor knows that choosing the right method should take into account your individual personality and preferences to increase the chances of success. If you’re someone who thrives on quick wins to stay motivated, the snowball method might be the way to go. If you’re more analytical and focused on minimizing interest payments, the avalanche method might be more effective. If you want to automate everything, set it and forget it, debt consolidation with a healthy savings/debt repayment pot is one way to simplify your financial growth.

Eliminating systemic inequalities

It’s important to recognize that there are systemic inequities that disproportionately affect marginalized communities, particularly Black and brown families. Factors like discriminatory lending practices, limited access to financial information to make more informed decisions, and historical wealth disparities have contributed to a cycle of debt that is difficult to break out of. As if that wasn’t enough, there’s been a rise in unlicensed financial influencers seeking to capitalize on the access and information gap faced by the Black community. These practices often target vulnerable populations, perpetuating financial inequality.

It is important to be aware of these predatory practices and seek out reputable financial institutions and resources. At the local level, community-based organizations and financial literacy programs can provide valuable support and advice to individuals facing debt issues. At the societal level, it is important that we address these root causes through policy change by pushing for financial product transparency, educating about deceptive practices, promoting financial and economic education in targeted communities, and advocating. With the repeal of the Chevron mandate, advocating for financial product transparency and predatory practices is more important than ever #intheBlaQ.

The path to financial freedom

Overcoming debt is a journey that requires patience, perseverance, and the will to change for the better. It’s about making conscious choices, developing healthy financial habits, and building a solid foundation for your financial future.

In my personal experience, there are tremendous financial benefits to sticking to a debt repayment plan when the debt is finally paid off and the repayment budget is completely switched to saving and investing. The “two-for-one” benefit of being debt-free and developing healthy spending habits within the budget is truly rewarding.

After all, financial freedom isn’t just about having money; it’s about having peace of mind, security, and the ability to pursue your dreams without the heavy burden of debt holding you back. By taking control of your money, getting educated, and seeking support when needed, you can free yourself and your family from the cycle of debt and create a better financial life for yourself and your loved ones.

Remember, you are not alone on this journey. There are resources and wealth advisors and financial consultants like me to help you every step of the way. With determination and the right strategies, you can achieve financial independence and build a legacy of wealth and prosperity for generations to come.