Debt Detox: Break Free in 2025

Debt. It’s heavy, exhausting, and sometimes feels like a trap you’ll never escape. You’re not alone - 59% of Kiwis say their finances have affected their mental health[1].​ But here’s the good news: debt doesn’t have to define your financial future. This year, let’s turn the tide and make 2025 the year you take control.
Here’s your step-by-step guide to detoxing your debt and reclaiming financial freedom.

Step 1: Understand Good Debt vs. Bad Debt

Not all debt is created equal. Some debt can actually work in your favour.

Good Debt: Think home loans or student loans. These typically support long-term goals, like owning a home or improving your career prospects. For example, a well-structured home loan can help you build wealth over time.

Bad Debt: Credit cards, cash advances, or high-interest car loans often cost more than they’re worth. They don’t add lasting value but can drain your resources with excessive interest rates.
Pro tip: Start by listing your debts. Categorise them as “good” or “bad” to understand where to focus your efforts.

Step 2: Reassess Spending Habits

Debt often comes down to spending habits. Are there areas in your daily routine where you could save? It might be as simple as making your morning coffee at home instead of picking one up on the way to work. Perhaps you’ve got subscriptions quietly draining your account that you no longer use, or maybe it’s time to trade those Uber Eats orders for a home-cooked meal shared with friends or family.

Taking the time to evaluate your spending can be eye-opening. Are there patterns or expenses that don’t align with your priorities? Even small adjustments can create more breathing room in your budget and free up money to put toward paying off your debts.

It’s not about sacrificing everything you enjoy - it’s about making thoughtful choices that prioritise your financial wellbeing. A few small changes today can lead to big progress tomorrow.

Step 3: Create a Debt Repayment Plan

Debt Snowball vs. Debt Avalanche: Which Is Right for You?

If paying off debt feels like an impossible mountain to climb, two tried-and-true methods can help: the Debt Snowball and the Debt Avalanche. Both are effective strategies for tackling debt, but they work in slightly different ways.

How They Work

Debt Snowball: Focus on paying off the smallest debt balance first, regardless of interest rates. Once that debt is cleared, roll the amount you were paying into the next smallest debt. This creates a “snowball” effect, building momentum as you tackle one debt after another. It’s great if you thrive on quick wins to stay motivated.

Debt Avalanche: Focus on the debt with the highest interest rate first. By eliminating high-interest debts faster, you’ll save more money in the long run. It’s ideal for those who are laser-focused on financial efficiency.

An Example in Action

Let’s break down how these methods work with the following debts:

Current Repayment Timelines and Amounts:

Personal Loan:

• $3,000 balance at 15.95% interest, fixed minimum payment of $115.45/month.
• Paid off over 33 months with $708 in interest.

Credit Card: 

• $5,000 balance at 18% interest, minimum payment of $100/month.
• Paid off over 66 months with $2,620 in interest.

Car Loan: 

• $15,000 balance at 11.95% interest, fixed monthly payment of $340.
• Paid off over 60 months with $4,140 in interest.

Total Repayment Time: 66 months (5.5 years).
Total Interest Paid: $7,468

However, after analysing your finances and rebudgeting, you find you can allocate an extra $80 a month to help tackle your debts head on. So, which repayment method will work best for you?

Debt Snowball Method

Starting with the smallest balance, applying the extra $80 to your repayments and working your way up, ensuring to keep up with the minimum payments on your other debts.

Step 1: Personal Loan

• Payment: $115.45 minimum + $80 extra = $195.45/month.
• Time to repay: 18 months.

Step 2: Credit Card

• Payment: $100 minimum + $195.45 = $295.45/month.
• Time to repay: 17 months after the personal loan (35 months total).

Step 3: Car Loan

• Payment: $340 minimum + $295.45 = $635.45/month.
• Time to repay: 12 months after the credit card (47 months total).

Total Repayment Time: 47 months (3 years 11 months)
Total Interest Paid: $6,682.

Debt Avalanche Method

This time, starting off with the highest debt and working your way down, while maintaining the minimum payments on other debts as you work your way through. 

Step 1: Credit Card

• Payment: $100 minimum + $80 extra = $180/month.
• Time to repay: 35 months.

Step 2: Personal Loan

• Payment: $115.45/month.
• Time to repay: 33 months (paid off before the credit card with minimum payments).

Step 3: Car Loan

• Payment: $340 minimum + $295.45 = $635.45/month.
• Time to repay: 13 months after the credit card.

Total Repayment Time: 48 months (4 years).
Total Interest Paid: $6,642.

Comparison of Results

Key Observations

• The Debt Snowball Method repays the debts in 47 months, saving $786 in interest compared to the current plan and offering psychological wins by clearing the smallest debt first.
• The Debt Avalanche Method repays the debts in 48 months, saving $826 in interest compared to the current plan and focusing on higher-interest debts for maximum financial efficiency.
• Both methods significantly outperform the current payment plan, which takes an extra 18-19 months to complete.

Step 4: Restructure for Success

The way your debts are structured can make a huge difference in how quickly and efficiently you can pay them off. Streamlining your finances not only simplifies your repayments but can also save you money in the long run.

Here are a couple of steps to consider:

Consolidate High-Interest Debts: Rolling multiple high-interest debts into one manageable loan with a lower rate can reduce your monthly repayments and make it easier to stay on top of your finances.

Review Your Mortgage at Re-Fix Time: If your mortgage is nearing its re-fix period, take the opportunity to shop around for better interest rates or more flexible repayment options. Small rate reductions can lead to significant savings over time.

By taking a proactive approach to restructuring, you can create a clearer path toward financial freedom. A little planning today can mean big savings tomorrow.

Step 5: Build Your Emergency Fund

Once you start paying down debt, it’s important to prevent falling back into the cycle. A small emergency fund acts as a buffer for unexpected expenses, so you’re not relying on credit cards to cover surprises. Unfortunately, as of May 2023, only 53% of Kiwis had access to $5,000 within a week if faced with an emergency. This highlights how many people are unprepared for the unexpected.

An emergency fund provides peace of mind and financial stability when life throws you a curveball – whether it’s a car repair, sudden medical bill, or an unforeseen job loss.

How Much Should You Save?

A good rule of thumb is to aim for three months’ worth of basic expenses. This includes essential costs such as:

• Rent or mortgage payments
• Groceries
• Utilities
• Transportation
• Minimum debt payments

For someone whose basic monthly expenses total $2,500, an emergency fund goal would be $7,500. This amount may take time to build, so don’t be discouraged – starting small is key.

Step 6: Don’t Go It Alone

Dealing with debt can feel overwhelming, but you don’t have to face it on your own. Talking to someone who understands the bigger picture can make all the difference.

At Lifetime, we focus on helping people take control of their finances in a way that feels achievable and sustainable. We’ll take the time to understand your unique situation – your challenges, your goals, and the things that really matter to you.

From helping you identify the difference between good debt and bad debt to restructuring your finances for more stability, we’ll work together to create a plan that suits your lifestyle and aspirations. It’s not about quick fixes; it’s about building a solid foundation for long-term financial wellbeing.

A Debt-Free Future Is Within Reach

Imagine opening your emails without dread, answering your phone without fear, and confidently planning for your future. That kind of peace of mind is possible, and it’s closer than you think.

2025 could be the year you take charge of your finances and start fresh. The right plan, the right tools, and the right support can make all the difference.

Get in touch today or call us on 0800 656 466 to start the conversation.

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

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