11/11/2013 4:45 PM ET|
How to stay debt-free
If there’s anything that’s as important as getting out of debt, it’s staying out of debt. Here are some ideas to help you get rid of debt.
The first step toward staying out of debt is to fully understand your current financial situation, and establish some goals on how you want to spend your money.
It might sound like an overwhelming task, but it helps to take small steps. Start by reflecting on your values and what is truly important to you. Then, using this information, write down the goals you would like to accomplish over the next five to 10 years.
Initially, you should just brainstorm, and write your goals as they come to mind; don’t analyze the practicality of each goal. Later, review your list of goals and prioritize those you’d really like to accomplish. This gives you a basis from which to make decisions on where to spend money.
But to realize these goals, you have to put what you have in writing into action.
Keep from getting in too deep
People frequently run into trouble with debt because they don’t understand their current situation. Evaluate your current cash flow by identifying your expenses and comparing them to your current income. Then see if — and where — you’re coming up short, and whether you are on track to accomplish your goals. Break it down into these steps:
1. Look through your checking account and credit card statements for the past year to determine where you have actually spent money. Be sure to include bills that are paid annually and expenses that are generally paid in cash. It can be helpful to categorize expenses as discretionary or non-discretionary.
2. Compare your expenses to your income and determine how much is left for saving and investing.
3. Evaluate how you are spending your money and how it aligns with your goals. Does your spending plan support or sabotage your plans? Rework your spending plan to better support your goals and values. Monitor your cash flow on a monthly basis to make sure you stay on track.
Generally, a great way to avoid going into debt is to live below your means. Make the tough decisions to keep your expenses below what you earn so you can deal with unforeseen problems when they arise. It is common for us to continually increase our expenses and standard of living as our income increases.
It’s easy to get caught up in a lifestyle that we can’t afford should we lose our job or run into other financial difficulties. And we can get trapped in a lifestyle and a job we may not enjoy. Living below your income provides you with the flexibility and security to adapt to a changing environment. Staying out of debt is generally under our control based on the decisions we make.
Create a safety net
There are a few key steps everyone should take to avoid going into debt. The first is to create and maintain an emergency fund of at least four months of expenses. This money should be kept in a savings, checking or money market account that is fully liquid. The second is to save at least 10% of your gross income. Think of this as a bill that must be paid. Initially, this may be used to build up an emergency fund and later may be used to build your retirement fund. By saving at least 10% of your income you always have a buffer to keep you out of debt should financial emergencies arise.
Finally, do not carry a balance on any credit cards or personal loans. If you can’t pay off your credit cards in full at the end of every month, don’t use them. Avoid financing personal items such as furniture, clothing and electronics. Instead, wait and save up the money to pay cash for the personal items that you want.
The good side of debt
There are some instances when debt can be a useful tool in achieving your financial goals, such as using a mortgage to purchase a house. However, when purchasing a home, it’s important to make sure that you can easily afford the mortgage payment and still have money to save and meet your other financial obligations.
Similarly, so is the reasonable use of student loans. A student loan can be a good investment toward getting a higher paying job once you graduate. Be sure to use student loans sparingly, and for a degree that will lead to a worthwhile career. As a rule of thumb, college loans should not exceed more than one year’s salary in your career of choice.
Some ideas for minimizing student loans include living at home, attending a community college for the first few years, working a part-time job and applying for scholarships. Parents should never sacrifice their retirement savings to put a child through college.
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There's no excuse for grown ups with kids to go into debt if you have your priorities right. Aside from medical emergencies- overspending, instant gratification, keeping up with the Jones's, are the main reasons. If I had to I'd get an even cheaper vehicle and/or share one with my wife. I'd get a smaller house, even rent a trailer. Eat cheaper cuts of meat, give up eating out. I grew up poor so it's nothing new to me. The hardest part would be giving up the HD cable package during football season.
My neighbor became unemployed but refuses to sell the big house or downgrade his car or take his kids out of private school. They still eat out 4 times a week. He had his wife take out a loan on the house to keep his current lifestyle after wiping out what little savings they had including his 401K. No way for me.
Don't buy stuff you can't afford!!
"Gotta shop" will get you in more financial trouble than anything. "I see", "I feel", "I want" -- that's the mantra of so many of today's young-adults (and, some older adults as well). In some ways, you can't blame them. Just look at the advertisements today. They make most of them an erotic experience -- that, folk**** right at the core, primal emotions of human beings. It is telling us, "buy me and you will feel soooo good - it's orgasmic!!!" When people have irresponsible sexual relations with each other for the "thrill-of -it", there is the possibility of an "unwanted pregnancy"; and, the probability of one or the other having to pay child-support as a result until that child matures. When people shop irresponsibly, for the "thrill-of-it", there is the possibility of "unwanted debt"; and, the results is "credit-support" payments until that debt matures/is paid off. And, just like people avoiding child-support payments, there are those who avoid their credit card payments. In both cases, they probably don't pay because, "they can't afford it"!!! See the correlation? So much for that "orgasmic", "feel-good" experience!!! Self-gratification and lack of self-control will get you every time.
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