Many, like me, must have felt firsthand that having debts is not merely a financial problem. I say this because being in debt is not just a negative balance in the bank or an overdue credit card. It also brings increased anxiety and stress, making a person go to and from work thinking about debts and how to pay them. Often, it causes detachment during conversations with friends and family, weighed down by the burden of seemingly unpayable debts.
Many can’t even sleep properly, leading to arguments with their spouse and children. You get it—quality of life goes down the drain when a person is in debt. So, the first step we must take is to recognize that debt is not merely a financial issue but something that affects almost all areas of life. As my great-grandfather used to say, “A man without money even walks differently.” I didn’t fully understand this phrase as a child, but over time, I grasped exactly what he meant. Being in debt, having no money at all, and facing many bills causes not only significant financial problems but also psychological distress, making a person feel downcast, sad, and worried, unsure of how to deal with the mountain of debt they have accumulated.
What Is a Debt?
Have you ever asked yourself what debt really is? It may seem obvious, but it’s not that simple. In the book The Total Money Makeover, author Dave Ramsey explains this concept in a very didactic way. He compares it to children crying in a store, wanting to buy a toy or candy, screaming, “I want it! I want it!” Even as adults, we still have this desire to buy things—sometimes things beyond our means. That’s when his phrase makes sense: “Debt is a tool to get what you want without actually being able to pay for it.”
In other words, every time we buy something without having the money to pay for it—such as charging it to a credit card while having no money in the bank or taking out a loan to fulfill a dream that will soon turn into a nightmare due to high interest rates—we are taking on debt. Debt is essentially a commitment to pay for something later.
The Credit Card Debate
I know the topic of credit cards sparks a lot of debate. Some people are disciplined and pay their bills on time, but the vast majority have no control when it comes to credit cards. After all, it is still debt. When we swipe a credit card, it is the bank that pays for the purchase at that moment. Then, we are required to pay the credit card bill the following month.
If you have a small credit card bill that you can pay easily, it is a debt you have taken on and managed to keep under control. However, the problem begins when someone cannot pay the bill in full and starts installment payments, accumulating interest and struggling to meet future payments. When this happens, it leads to a snowball effect, where a person takes out loans to cover existing debts, only to fall deeper into financial distress. Once bills are overdue and interest starts accruing, the individual is officially delinquent.
If you are thinking, So, using a credit card isn’t bad—only failing to pay the bill is?—well, that depends. If you have absolute control over your spending and have never had an issue with credit card debt, then fine. But the vast majority of people are controlled by their credit cards, starting with small debts, gradually increasing their spending, and then getting hit with a bill they can’t pay.
Moreover, if you don’t have an emergency fund, any unforeseen expense also ends up on the credit card, making it impossible to pay off. This leads to the well-known debt spiral: installment payments add up, new expenses pile on, and monthly bills exceed the individual’s income, making default inevitable.
How to Get Out of Debt
Many people believe the first step to getting out of debt is to start paying them off immediately. However, according to Dave Ramsey, the first step is actually to build a mini emergency fund before tackling debt repayment. This fund provides financial cushioning, so if an emergency arises during the repayment process, you won’t have to take on more debt to handle it.
A good rule of thumb for a mini emergency fund is:
- If your monthly cost of living exceeds $3,000, aim for at least $1,000 in savings before you begin repaying debt.
- If your monthly expenses are $2,000 or less, an emergency fund of $300–$500 should suffice.
To put things in perspective, a 2023 Ipsos survey found that 61% of Brazilians don’t save any money for investments or emergencies. Just by having a mini emergency fund, you’re already ahead of a significant portion of the population.
Financial X-Ray: Understanding Your Debt
Before beginning debt repayment, it is crucial to:
- List all your debts: Know exactly how much you owe and to whom.
- Structure your budget: Track your income and expenses.
- Identify unnecessary expenses: Find areas where you can cut costs to free up money for debt repayment.
- Increase your income: Look for side jobs, sell unused items, or start small ventures like selling homemade goods.
Debt Repayment Methods
1. The Snowball Method
One of the most effective ways to repay debt is the Snowball Method, as popularized by Dave Ramsey. It involves:
- Listing all debts (excluding mortgage loans).
- Organizing them from smallest to largest.
- Paying the minimum on all debts except the smallest, to which you allocate as much extra payment as possible.
- Once the smallest debt is cleared, rolling that payment into the next smallest debt, creating a “snowball” effect.
This method helps maintain motivation because it provides quick wins, reinforcing financial discipline.
2. Negotiating with Creditors
Another alternative is to save up and negotiate a lump-sum settlement with creditors. For example, if you owe $5,000 but manage to save $3,000, you might be able to negotiate a reduced payoff. Many banks prefer accepting a lump-sum payment rather than waiting for uncertain monthly payments with accrued interest.
Conclusion
The most important thing is to get out of debt and regain financial stability. Once you’ve cleared your debts, the next step is to focus on building a full emergency fund, which will be covered in the next part of this series.
By adopting the right strategy, maintaining discipline, and staying committed to financial independence, anyone can escape the debt cycle and start making their money work for them instead of being trapped in endless installments and interest payments.
