Are you looking to make smarter financial decisions? Are you wondering if there are ways to prevent getting into debt?
Financial freedom is about more than your bank account. Good financial health can alleviate stress as well as improve your mental, physical, and emotional well-being. Staying away from debt is one of the best things you can do for yourself and your family.
Here’s what you need to know about how to avoid debt.
1. Budget
While all of us know how important budgeting is, the task itself always seems a bit daunting. However, a simple personal budget may not be as difficult to keep track of as you think.
Start by creating a simple spreadsheet where you list your monthly income as well as your monthly expenses. These could include mortgage payments, car payments, and utilities. In addition, you’ll want to monitor expenditures on things like personal care, entertainment, and transportation.
It’s essential, to be honest with yourself about what you normally spend. Some expenses, such as your groceries, will vary from month to month. You can estimate these based on your last two or three credit card statements.
As long as your income is higher than your expenses, you’re in a good place to avoid getting into debt.
You’ll want to put away a certain amount of money each month for savings. Ideally, it should be around 20% of what you make. If possible, you can also put away a certain amount each month for unexpected expenses.
If you’re new to budgeting, you can begin by setting realistic goals for each month or year. For example, you may want to put away $3,000 by December. You’ll want to think about how much you need to reasonably set aside each month to meet our goal.
Budgeting goals can be discouraging if they’re too high. If you know you won’t be able to set aside a thousand dollars a month, for example, don’t plan on saving $15,000 by the end of the year. Instead, keep your goals reachable.
It’s important, however, to make sure you’re specific about what you plan to do. Not thinking about the future could lead to more debt.
2. Cut Your Expenses
An honest look at your budget can help you realize where you’re spending money indiscriminately or unnecessarily. For example, maybe you realize that you’re spending $150 a month for your daily coffee kick. You can save some serious cash by making your coffee at home and only treating yourself occasionally.
It’s important, however, to remember that every month is different. Many folks, for example, spend more money in November and December because of the holidays. If you know this will be the case for you every year, make sure you’re planning for this season with your savings.
You may also be able to get creative about saving on your bills by switching your cable service or car insurance. You can start working out at home to save on expensive gym memberships or start clipping coupons. Online community groups are a great way to get ideas on how to make your lifestyle more affordable.
It’s also important not to get into the comparison game when you’re looking to trim your budget. Your best friend may be taking a Caribbean vacation or purchasing a new car while you’re just trying to meet your monthly expenses.
Don’t let someone else’s situation impact yours. If you’re doing the responsible thing and looking to keep costs down for your family, you’ve got a lot to be proud of.
3. Don’t Carry a Balance
Life happens, and it’s tempting to carry a balance on your credit card. However, the compounding of interest after a few months can really make it difficult to pay off.
Having a good reserve in savings will make it unnecessary to put the money you don’t have on your credit card when there is an emergency. If possible, limit yourself to only one or two credit cards so you can be certain that you’re paying them off each month. If you do accrue a balance, tighten your budget until you can pay it off.
4. Resist the Urge to Buy a New Car
If you’re looking to avoid unnecessary debt, get a used ride to get you around. Cars will depreciate by as much as 40% of their value within five years. They may also cost you more to insure.
Used cars, by contrast, have already seen most of their depreciation. Today’s used vehicles are certified and inspected, and many also come with a warranty. If you aren’t good at shopping for used cars, invite a friend or family member who can help you sniff out a deal or negotiate a good price.
5. Keep a Low Debt-to-Credit Ratio
Your debt-to-credit ratio is the ratio that shows how much credit you’re using as it relates to the amount you have available. It’s important to keep if you need to get out of debt so you’ll have a little flexibility. A high ratio also means that you’ll be making very high payments on interest.
You can keep this score low by lowering your spending, as well as raising your credit limit.
How to Avoid Debt
Credit card debt can lead to several problems that include stress, depression, and other health issues. You can avoid debt with careful planning, saving, and budgeting. With a little forethought, you could be on your way to a healthy financial future in no time.
Don’t stop getting smart about your financial future now. For more information on debt reduction, contact us today.
