Freedom Clock – Escape the Debt Trap

Freedom. People plan for it, take chances for it and some die for it. We all start life with financial freedom. Americans receive a social security number and use it to gain employment, pay taxes (yay!), earn social security credits and borrow money. As a kid you feel financial stress if your parents have overwhelming debt, but it is their debt not yours. Think about how creative and joyful you might be if you could return to a stress-free state. In this article I share what I’ve learned by getting trapped and then escaping debt.

My Debt Story

I was 18 and applying for college. My parents helped, but could not afford all college expenses. The total was roughly 10k per year. I applied to school and my next application was for FAFSA financial aid. My financial aid came in the form of Federal Student loans. Read more about the student loan problem in this country.

Debt Load Increased

My early history with debt:

• Borrowed maximum FAFSA Stafford student loans each year for 4 years. Graduated from college.
• Borrowed maximum Stafford loans for graduate school for 2.5 years
• Opened first credit card at 23
• First consumer debt – borrowed a few thousand dollars for an engagement ring. Got married.
• Other debts through our 20s: car loans and various store credit cards (Best Buy, Target, Macys, Kohls etc.)
• Student loan surprises – 6 months after our wedding, I opened the mail to find a 20k statement for private student loans. We knew about Sarah’s other 25k in Federal student loans, but not this 20k. She was not aware of the complete structure of her financial aid. Between the two of us, we had approximately 70k in student loan debt.

Debt Escalates

Through our 20s the stakes got higher. We bought a house and had kids. We reduced our middle-class income by 50% so Sarah could stay home with them. Not an easy one, but I still believe it was the right decision for our family – costly though. We put ourselves in a difficult financial position. With two car loans, mortgage, student loans, and now ever-increasing credit card balances. Then, I made the strategic decision to enter the commission-driven career of financial advice. We were up to our eyeballs in debt and adding to it monthly. I wrote out credit card “convenience checks”, juggling debt between credit cards. Very conveniently getting further in debt. We withdrew retirement assets creating severe taxes and penalties. Knowing this was erasing the good early jump on retirement saving we had begun in our 20s. And five years into financial advising, I had to walk away from 10,000 hours of work invested in that business.

Escape Plan

In March of 2020, we paid off the last of our Consumer debt – still have a mortgage. Here’s how we did it:

• I changed jobs to one with a salary that we could plan around
• Stopped adding to the balance with tight budgeting. For several years Sarah and I planned each expense category before the month began. Pursuing this goal together helped reduce unplanned spending.
• Eliminated high interest debt – took out a 401k loan to refinance credit cards at 15% interest to 4%. It was encouraging to see the balance declining with each month’s payment. 401k loans have a max term of 5 years. The short term ensures a large percentage of each payment goes to principal
• Family involvement – as a family we discussed the debt pay off goal together. My kids needed to understand why we didn’t travel, drove old cars, fixed stuff ourselves and cooked at home. And I wanted them to remember the feeling of accomplishment when we paid off the balance.
• Set our sights on the finish line. This is where my interest in planning and personal finance intersect. I used two tools:

Tools

Debt Reduction Tracker – to plan your paydown strategy, input your current balance, interest rate, automatic payment. Then adjust the extra payment to see how extra payments speed up the paydown:

Freedom Clock – I created this tool to keep the goal top of mind and visualize progress. The Freedom Clock updates each day to show how many work days remain until the goal is met, taking into account weekends, holidays and PTO. There’s something motivating about driving in to work, when you know it’s one day closer to your goal:

Life’s tough out there. We’re bombarded with advertising aimed at helping us Keep Up with the Joneses’. If you allow it, you can follow the typical path and jump on a debt treadmill that’s painful to get off. I urge you think carefully about big borrowing decisions. They can create cashflow problems that lead to creeping credit card balances. Tread lightly and don’t spring that trap. And if you’re already stuck in a bad situation. Take it from one who has come out the other side: Don’t lose Hope and Create a Plan.

Download and use the Debt Reduction Tracker and Freedom Clock to form your own escape plan.