Debt can feel like a constant weight holding you back from true financial freedom. And financial freedom is so much more than just a buzzword – it’s a goal many Canadians strive for. For many, the dream of living debt free feels distant, buried under rising costs, surprise expenses, and the easy lure of credit. But here’s the good news: achieving financial independence isn’t just a dream – it’s entirely within your reach. Whether you’re overwhelmed by credit card debt, struggling with student loans, or facing never-ending bills, the path to financial freedom starts with the right plan. In this guide, we’ll break down actionable steps to help you live debt free and build a secure, stress-free financial future.
How to live debt free
Living debt free may seem like a distant dream, but with the right approach, it’s an attainable reality. By creating a solid plan and making smart financial decisions, you can take control of your finances and eliminate the burden of debt for good. Here are the steps we recommend you take:
Take stock of your debt
The first step toward being able to live debt free is understanding exactly what you owe. Make a detailed list of all your debts, including:
- Credit card debts
- Personal loans
- Student loan debts
- Car loans
- Mortgages
Next, note the interest rates and minimum payments associated with each debt. This will give you a clear picture of where you stand and help you prioritize which debts to tackle first.
Create a realistic budget
Once you’ve taken stock of your debts, it’s time to craft a realistic budget. A budget helps you control where your money goes and ensures that you’re not spending more than you earn. To build a sustainable budget:
- Track your monthly expenses: identify essential vs. non-essential spending.
- Allocate funds for debt repayment: prioritize paying off debt while still covering your basic needs.
- Cut unnecessary expenses: streaming services, dining out, and impulse purchases can drain your budget. Cut back where you can.
The goal is to create a budget that balances your immediate needs while allowing you to pay down debt aggressively.
Set financial goals
Financial goals give you direction and purpose. Setting specific, measurable, and achievable goals can help you stay motivated. For example:
- Short-term goal: pay off credit card debt within a year.
- Medium-term goal: build an emergency fund of three to six months’ worth of living expenses.
- Long-term goal: save for a down payment on a house or invest for retirement.
By having clear objectives, you’ll find it easier to stick to your financial plan.
Choose a debt repayment strategy
There are two popular methods for repaying debt in order to live debt free:
- The debt avalanche method: focus on paying off the debt with the highest interest rate first, while making minimum payments on other debts. Once that debt is cleared, move on to the next one with the highest rate. This method saves money on interest over time.
- The debt snowball method: start by paying off the smallest debt first, regardless of interest rate. The psychological boost of quickly eliminating a debt can keep you motivated.
Choose the method that best fits your financial situation and temperament.
Seek professional help from a Licensed Insolvency Trustee if needed
If your debt feels overwhelming, don’t be afraid to seek professional help. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, making them well placed to review your financial circumstances and advise you on an appropriate debt relief solution. Debt relief agencies, like Spergel, offer a variety of solutions tailored to your unique circumstances, including:
- Debt consolidation: combine multiple debts into a single payment, often at a lower interest rate.
- Consumer proposals: negotiate with creditors to reduce the total amount you owe.
- Credit counselling: get advice on managing your finances and making a repayment plan.
With expert guidance, you can take control of your debt faster and more efficiently.
Build an emergency fund
One of the keys to living debt free is avoiding future debt. Building an emergency fund is a crucial safeguard against unexpected expenses like car repairs, medical bills, or job loss. Start small – aim for $500 to $1,000 – and gradually build your fund to cover three to six months of expenses. An emergency fund ensures you won’t need to rely on credit cards or loans when life throws you a financial curveball.
Invest in your future
Once you’ve eliminated debt and built an emergency fund, it’s time to start thinking about your financial future. Contribute regularly to retirement savings (such as an RRSP or TFSA) and explore other investment options. By investing, your money works for you, helping you grow your wealth and secure long-term financial freedom.
Maintain financial discipline
Learning to live debt free isn’t a one-time achievement – it’s a lifestyle. To maintain your financial freedom:
- Stick to your budget.
- Avoid lifestyle inflation. As your income increases, resist the urge to spend more.
- Use credit wisely. Avoid falling back into debt by using credit cards sparingly and paying off balances in full each month.
What are the benefits of learning to live debt free?
According to Statistics Canada, the average Canadian household owes approximately $1.85 for $1 had in disposable income. This indicates a rising reliance upon debt to pay for everyday expenses. Although this indicates that it can be difficult to live debt free nowadays with a rising cost of living and increased interest rates, it’s certainly achievable with some commitment and determination. Living debt free has a number of advantages, including the following:
- Less stress – there’s nothing worse than worrying you don’t have sufficient funds to cover your bills each month. Anxiety and stress can lead to other mental health problems, and you can feel nervous about other consequences like a negative impact on your credit score. Living debt free means you’ll have less financial obligations to worry about, so that you can focus on the other important elements of your life.
- More freedom to do what you enjoy – many Canadians stay in unfulfilling jobs for the sake of maintaining a certain lifestyle, but you could be happier in lower-paying, more fulfilling work if you were willing to sacrifice some purchasing power with less debt and bills.
- Improved credit – one of the fastest ways to boost your credit score is by lowering your debt-to-income ratio, which improves as you pay off debts like credit cards and loans, making it easier to borrow for major life purchases like a home or business.
- Increased financial security – a recent Angus Reid survey found that most renters and homeowners couldn’t handle an unexpected $1,000 expense due to insufficient emergency savings, but living debt free enables you to save more, offering greater financial security for life’s surprises.
- Stronger relationships – financial stress can strain or even destroy relationships, but by adopting a more conservative approach to spending and finances, couples can be better equipped to navigate difficult financial situations together.
Live debt free: FAQs
Here are some of the most common questions we are asked about how to live debt free:
How can I live debt free in Canada?
To live debt free in Canada, start by creating a detailed budget that tracks your income and expenses. Prioritize paying off high-interest debts, such as credit cards or payday loans, while minimizing new debt by using cash or debit for purchases. Consider consolidating debts to lower interest rates and make payments more manageable. Building an emergency fund and cutting unnecessary spending can also help prevent future debt. Finally, seek professional financial advice or debt solutions, like a consumer proposal, from a Licensed Insolvency Trustee if you’re struggling to manage on your own.
What percentage of Canadians are debt free?
It’s important to note that carrying debt is normal, and very few Canadians are 100% debt free, be it due to mortgages, personal loans, or credit card debt. Often, even those with near perfect credit scores will likely be paying off a student loan or car loan debt. Here’s the average amount of debt by age carried by Canadians to give you some perspective on your own financial circumstances.
Is it possible to live a debt free life?
Yes! It’s possible to live a debt free life, though it requires discipline, careful financial planning, and lifestyle adjustments. Achieving this often involves creating a budget, avoiding unnecessary spending, paying off existing debts aggressively, and building an emergency fund to avoid relying on credit. Many people successfully become debt-free by reducing their reliance on borrowing and focusing on saving and investing. For some, however, particularly in regions with high costs of living, it can be more challenging due to factors like housing prices and education costs.
Living debt free and achieving financial freedom is within your reach. By understanding your debt, creating a budget, setting clear goals, and using the right repayment strategies, you can take control of your finances. With discipline and determination, you’ll not only eliminate debt but also build a stable financial future. At Spergel, we’re here to support you every step of the way. Whether you need help managing your debt or want guidance on your journey to financial freedom, we have the expertise to help you succeed. Start your journey today – book a FREE, no-obligation consultation with one of our Licensed Insolvency Trustees today.
