Debt Freedom: Essential Steps to Master Your Finances

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Debt can be financially stressful, thanks to compounding interest pushing the finish line further away and payments shrinking your monthly cash flow. But carrying that burden doesn’t only affect a borrower’s wallet.

A recent survey from Freedom Debt Relief and Money.com found that the top motivations for paying off debt aren’t actually financial: 48% of respondents said their desire to stop feeling stressed or anxious about money contributed to their motivation to reduce their debt, and another 48% said they wanted to regain control of their finances. That’s compared to 45% who were motivated by rebuilding their credit score and 44% who wanted to save on interest and fees. The survey asked 1,800 Americans with at least $10,000 in unsecured debt about their finances.

“Paying down debt is both a financial decision and an emotional one,” says Mike Casey, a financial planner and founder of American Executive Advisors. “For many people, eliminating a balance creates a powerful sense of control and reduces financial anxiety,”

What motivates people to pay off debt

There are emotional motivators beyond combatting stress and regaining a sense of control. Thirty percent of the survey respondents indicated that improving their physical or mental health was an incentive for paying down debt, and 12% said they want to reduce conflict with a spouse or partner.

The more debt borrowers have, the more likely they are to cite emotional reasons for wanting to pay it off. The same is true for borrowers juggling multiple debt accounts: About a third of respondents who only have one or two accounts cited reducing stress and anxiety as a motivator, compared to more than 60% of borrowers with six or more accounts.

Borrowers want to change their debt situation for financial reasons, too. Thirty-nine percent of survey respondents said they wanted to eliminate debt to increase their day-to-day spending flexibility. At the same time, 21% said it was to qualify for a major purchase, like a home or car, and 15% said it was to prepare for a major life change, such as getting married or having a child.

Balancing debt payoff with other financial priorities

Carrying expensive debt can trickle into every aspect of your financial life, so it’s little surprise that it can cause distress. But focusing on your debt at the expense of other basic financial needs could do more harm than good.

“Putting every available dollar toward debt can leave you vulnerable to the next unexpected expense,” Casey says.

Instead, a balanced plan of attack — where you reduce your balances and build a strong financial base — can help you combat some of that debt-induced financial anxiety.

Here’s how you can do both at once.

1. Create a financial base

Casey recommends building a financial floor before aggressively attacking debt.

“Start with a starter emergency fund, often $1,000 to $2,500 so a car repair, medical bill or other surprise doesn’t immediately go onto a credit card,” he says. “Then work toward three to six months of essential expenses as your cash reserves improve.”

Financial advisors typically recommend keeping this cash somewhere you can easily access it but where it will also slowly grow over time, such as a high-yield savings account.

2. Prioritize high-interest debt

The higher the interest on your debt, the harder it can be to pay it off — and the more stressful it is to carry it. Credit cards often come with annual percentage rates (APRs) above 20% meaning that if you let your balance linger, it will quickly grow.

You should prioritize paying down credit card debt over additional investing beyond an employer match in a retirement savings account such as a 401(k), says Marisa Bradbury, a financial advisor and managing director at Sigma Investment Counselors. “Lower interest rate debt like student loans or a mortgage may not need to be eliminated before beginning long-term savings.”

While you’ll want to focus on the high-interest debt first, it’s best to make the minimum payments on all your accounts to keep interest from accruing.

Of course, this strategy assumes that you have enough money in your budget each month to pay at least a little bit more than the minimum on your debt. If that’s not the case, you’ll have to look for ways to trim spending or increase your income so you have the cash to accelerate debt repayment.

If you have a strong credit score, you can also look into consolidating your debts. This can help in a couple different ways: You can consolidate into a lower-rate loan and use the savings on interest to pay down more principal or you can consolidate with the goal of reducing your monthly bill and use the freed up money to build the financial base discussed above. (Alternatively, if you’re struggling to afford even the minimum payments and you can’t qualify for a consolidation loan with better terms, you may need to consider more aggressive options, such as negotiating with creditors to settle your debts.)

3. Automate repayments and savings

Next, Casey recommends creating a system that addresses the psychological aspect of debt repayment in addition to the math of what goes in and out of your bank account each month. Automating can help, since it takes away the need to remember to move your money. You can automate savings and debt payments to align with your paydays, then direct additional cash toward the highest-priority goal.

“This turns financial progress into a habit rather than a series of emotional decisions,” Casey says. “The goal isn’t to become debt-free at any cost. Financial freedom means reducing debt while simultaneously building the liquidity and assets that keep you from needing to borrow again”

4. Set goals and celebrate wins

When you have $10,000 or more in credit card debt, getting started can feel daunting because a debt-free life feels so far away.

“Having smaller, more achievable goals rather than ‘paying off all my debt’ can help ease some anxiety and give you some momentum to keep going,” Bradbury says. Start with the goal of paying off one credit card in full or reducing your total debt by $1,000, for instance.

Once you hit that goal, celebrate. It’s best not to start charging the credit card again, but hosting a movie night at home with friends or trying out a coffee shop you’ve been eyeing to commemorate your accomplishment can fuel the motivation to take on your next goal.