7 Steps to Financial Freedom

Debt Management

Concerned about your debt load? You’re not alone. While Canadians have kept their borrowing in check, they haven’t stopped piling on debt. The issue is not the amount of debt you might carry, but rather your ability to repay it. Below are seven debt management actions you can take now to put yourself back on the road to financial freedom.

1. Pay yourself before others.

It’s like the instructions you hear on an airplane: Always secure your own oxygen mask before assisting others. You won’t be in a financial position to care for others if you don’t take care of yourself first. Put a specific percentage of your earnings into a savings plan that provides long-term guaranteed growth. Start with a percentage or amount that is reasonable and increase that percentage a bit each year. Saving money is a habit you create with action.

2. Get rid of inefficient debt first.

Paying down debt efficiently means knowing what debt you should pay first, how fast you should pay it, and when to take a break from paying it. A proper debt management strategy will incorporate cash flow optimization—making your money work harder for you so you have more of it to work with. For example, instead of splitting minimum payments between multiple loans to pay debt, you overpay one loan at a time. It’s not necessarily the highest interest loan you pay first. *A tool called the Cash Flow Index gives you an idea of what debt to pay first.

To get a Cash Flow Index for each of your loans, divide the loan balance by its minimum monthly payment. A high number over 100 means the loan is efficient. A low number under 50 means it is inefficient. You want to pay off the most inefficient debt (lowest CFI number) first. When you focus on paying off inefficient debt rather than debt based on its interest, you free up more of your cash flow.

3. Consistently spend less than you earn.

Have you ever heard of Parkinson’s Law?  Many years ago, English write C. Northcote Parkinson explained why people retire poor when he developed one of the best laws of money and wealth accumulation. Parkinson’s Law states no matter how much money you earn, you will spend more and little bit extra besides. As a result, your expenses tend to rise in lock-step with your earnings.

The key to financial success is to violate Parkinson’s Law by driving a wedge between what you earn and what you spend.  You want lifestyle expenses to increase at a slower rate than your earnings and save the difference. As your income increases, you can begin to improve your lifestyle. When you resist the powerful urge to spend everything you make, you begin to accumulate money.

4. Embrace a mindset of value-based spending versus budgeting.

Conventional financial advice focuses on budgeting today to save and stockpile money away for retirement. This simply doesn’t work. Budgeting places restrictions on your ability to enjoy life in the present. Deprivation perpetuates overspending which keeps you trapped in the debt cycle. You need to strike a balance between saving and spending.

A more moderate approach is to adopt an attitude of conscious value-based spending. Value based-spending assigns a value to what you want to spend your money on. For example, identifying productive expenses that increase your value and productivity will help you cultivate the lifestyle you desire as opposed to destructive expenses that don’t align with your needs, goals, dreams or values.

Destructive expenses include things like overdraft fees, credit card loans, gambling, smoking and not living within your means. Spending money on such things destroys your value and productivity. Productive expenses are life-enhancing and value-based such as investing in education to increase your skills and in your business. Spending money on productive expenses increases your “human value” and your ability to produce. The more productive you can be, the more value you bring to the world.

5. Don’t invest money you can’t afford to lose.

Conventional financial advice claims to save your money, you need to grow your money. But growing your money requires investing  risking money you can’t afford to lose. Investing money won’t guarantee growth when an element of risk is involved. In fact, along with the potential for faster growth, is the potential for greater loss, especially when you factor in stock market volatility. Since 2000, the stock market has experienced losses of 49%+ from two separate crashes.

To invest means to put money in a financial vehicle or asset that has a certain amount of risk and no actual guarantees of growth.To save means to put your money in a vehicle that is safe, protected from loss, and has long-term guaranteed savings growth without unnecessary risk.

6. Understand the return of your money is more important than the return on your money.


Don’t try to chase a rate of return investing money you can’t afford to lose. Put your can’t-afford-to-lose money in a predictable guaranteed savings growth vehicle such as whole life insurance with a cash value or segregated funds. Slow and steady growth that yields conservative returns over the long-term will get you further ahead financially and prevent you from losing money you can’t afford.

7. Learn how to use the power of compound interest as a wealth accumulation tool.

Albert Einstein said it best: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it. Most of us only understand the idea of simple interest which is interest calculated on the principal, or original part of a loan. Compound interest is the interest you earn each year that gets added to your principal so your balance doesn’t just grow—it grows at an exponential rate. Compound interest is your money working for you at it’s finest because you are receiving growth on growth, as well as on your principal amount.

Check out the following Compound Interest Calculator from the Ontario Securities Commission to see how your money can grow with compound interest.Be mindful however. As much as compound interest can grow your money, compounding fees and taxes can also work against you and eat away at your wealth. Implement savings strategies that minimize fees and taxes.

*The Cash Flow Index is the intellectual property of Wealth Factory and has been used here with their permission
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Disclaimer: This information is given for informational or educational purposes only. All financial endeavors should be vetted through a financial professional; example, life insurance broker, financial but not limited to its agents, staff, associates and/or partners will not assume any liability for any information printed in this article; indirectly, or assumed.