What Does it Mean to Be Debt-Free?

Many people in the UK struggle with debt in various forms, such as credit cards, loans, or overdrafts. According to studies, 46% of adults used their consumer credit in 2022, and the average adult had £3,965 in unsecured debt in 2023. In the same year, around 8.1 million people needed debt advice.

People are always looking for ways to become debt-free to feel financially secure and have peace of mind. They also want to enjoy the freedom that comes with not having to worry about their finances due to debt-related obligations. That said, what does it indeed mean to be debt-free, and how can you achieve it?

Understanding How Debt Works

As mentioned earlier, debt comes in many forms, including:

• Personal loans – Funds borrowed from banks or online lenders that need to be repaid on time with the appropriate interest rates
• Credit card balances – Ongoing credit debts that increase over time with high interest unless fully paid each month
• Overdrafts – Transaction fulfilment from the bank’s end even when you don’t have enough money in your account to cover said transaction
• Payday loans – Short-term loans for small amounts of money that you’ll need to repay with a high interest rate when you receive your next salary
• Mortgages – A secured loan from a bank that lets you buy a property, which can be sold by the bank in case you fail to make the required monthly repayments
• Student loans – A government-backed loan for students with options to accommodate the tuition fees and living expenses

While these borrowing options can help you now, they can accumulate quickly and drain you financially if left unchecked. While structured debts like mortgages or student loans are relatively manageable, high-interest debts such as credit card balances and payday loans can spiral out of control faster than you realise. How do you deal with these debts?

Steps to Becoming Debt-Free

1. Assess Your Financial Situation

To get the complete picture of your current financial standing, you’ll need to start by listing all your outstanding debts, current balances, interest rates, and the minimum payments you can make for your debts.

2. Create a Budget and Cut Unnecessary Expenses

One of the best ways to manage your income efficiently is to look for areas where you can cut expenses and use those funds to repay your debts. For instance, you could cancel subscriptions you no longer use, avoid spending on luxury items, and consider cheaper alternatives to save energy costs.

3. Prioritise High-Interest Debts

To start chipping away at your debt, go down your list in descending order of interest rates and focus on paying off the high-interest debts first. Reserve the low-interest debts for later, as they won’t be too much of a financial burden.

4. Consider Low-Interest Loan Alternatives

Although payday loans generally come with high interest rates, there is an option for low interest payday loans that you can use to consolidate your debt if you’re struggling with multiple high-interest loans. This option offers better repayment terms and can reduce your financial strain, giving you some breathing space while you work through other debts.

5. Find Ways to Boost Your Income

Every extra pound that you earn can be directed toward your debt reduction. You could consider taking up side gigs, freelance work, or even selling unwanted items to boost your income.

6. Contact Professionals for Advice

Non-profit debt charities like StepChange, National Debtline, and Citizens Advice offer free financial advice and debt management plans. While doing your research is always a good idea, there’s nothing wrong with seeking free guidance, as it can help you make more informed decisions.

Staying Debt-Free for Life

The best part about debt-free is the mental peace that comes with it. That said, how do you ensure you don’t fall back into the debt cycle after you’ve successfully paid off all your debts and become debt-free?

It’s essential to keep track of and learn from your financial mistakes. If unexpected expenses arise or temptations to spend on things that you can’t afford present themselves, take a moment to consider how similar impulsive decisions impacted your finances before. You can make better choices and avoid debt by staying mindful of your spending habits.  

Here are the following steps to take which can help you achieve that goal:

• Borrow only if necessary – You should try to avoid taking loans of any kind unless you’re entirely out of options
• Build an emergency fund – Structure it in a way that you’ll be able to withstand at least 3-6 months’ worth of living expenses and cover unexpected costs
• Use credit responsibly – Make sure you don’t bite off more than you can chew; you have to consistently pay off the entire balance every month
• Make investments for your future – Set up avenues to grow your wealth over time, such as savings accounts, real estate investments, or stocks and shares
• Regularly review your finances – Keep track of your spending and adjust your budget as needed

To Sum Up

Debts, while helpful, can also be an annoyance in your life until you ultimately pay them off. They accumulate faster than you realise, leaving you feeling vulnerable, stressed and anxious.

The good news is that with a clear budget in place, discipline, and a focused mindset, you can be the one in control of your finances and not the other way around. Taking advantage of side gigs, low-interest payday loans, and professional advice are just some of the ways to help you get on that path of achieving your goal of financial freedom.