Kat's Money Corner: The price of freedom

Heading into the July 4 holiday, I’m thinking about freedom, and the ways in which our freedoms are threatened.

katWhen most people think about threats to freedom, they may think about politics or ideologies. As far as I’m concerned, though, the single biggest threat to true freedom for most Americans is something very different: debt.

Not the national debt. Household debt.

Think about it: What factor places more constraints on your decisions on where and how to live, work and play than debt? Anytime you feel that you’re doing what you have to do, instead of what you really want to do, chances are it’s in order to “pay the bills.”

Suppose you were debt free. No credit card bills, no mortgage, no car payments, no loans of any kind to repay. What different choices would you make? How different would your life really be? The difference between the live you would lead, and the life you do lead, is the measure of the toll debt takes on your freedom.

For Americans as a group, it’s a big gap. The nation’s revolving debt load – essentially, credit card balances – totaled $825 billion in the fourth quarter of 2010. That’s a lot of plastic shackles on our freedom.

How do you stand as an individual in terms of debt? A good place to start is by calculating your debt-to-income ratio. This online calculator from U.S. News will give you a good estimate; the magazine says that a ratio of 36 percent or less is healthy, while a ratio of 43 percent or higher is looking for trouble.

Another way to analyze your debt is to figure out how long it can take to get out from underneath it. Here’s another calculator, from CNNMoney, that shows how long it will take you to pay off your credit card debt with different monthly payment levels. (Remember, it’s not as simple as dividing the balance by a set amount, thanks to the compound interest that keeps piling up while you have an outstanding balance.)

Perhaps the best way to figure out whether your debt load is over the top is by taking a realistic look at how much flexibility you have in your budget, as this Wisebread post explains.

Say you have to deal with an unexpected increase in expenses (a major medical bill or an expensive but necessary home repair), or cut in income. If you can compensate by cutting back on savings or lifestyle spending, or tapping your emergency fund, then you’re OK. If your debt is at the point where such a situation immediately triggers additional debt (such as putting gas and groceries on the credit card) then you are in trouble.

How do you reduce debt and gain freedom? Well, that’s what this blog is about every week. The formula is simple to say, though harder to do: live more frugally, and use the savings to pay down debt at a faster rate.

It’s not easy. It’s not fun. But when you compare it to the sacrifices that so many have made for our freedom throughout this nation’s history – and that brave men and women in uniform continue to make today – it can seem pretty small.

The Money Corner is posted on Dollars & Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her newborn, is a manager with CommunityAmerica Credit Union.
For more financial chatter, click here.