Your Comprehensive Guide on How to Avoid Debt
If you are looking to avoid debt and are learning how to avoid debt then you need to be proactive about managing your money. The main thing to learn about how to avoid debt is that it requires you to have a financial plan and you don’t want to buy into foolish whims that bring you short-term satisfaction.
While it’s easy to run up a lot of credit card debt, it can also be easy to learn how to avoid debt if you follow a few simple tings and take a proactive approach.
Stay Employed
One of the best ways to avoid debt is to keep up with full-time employment. Full-time employment also makes paying down debt much easier. While losing a job can be random, it can be helpful to maximize your relationships in the office. In order to help ensure your security, you should always be professional in your contacts. If you are looking for a job, it’s always best to start networking with someone you know to help get your foot in the door, instead of just making cold calls. You should also always be keeping up with the latest trends in the industry and be learning from experts. Many industries are going to be changing on almost a daily basis so if you aren’t paying attention, it can be easy to get left behind, especially during restructuring. Keep the job you already have by showing up on time and meeting deadlines.
Be Cautios About Starting a Small Business
While a small business may seem like a good idea, you need to know that it can also create some debt obstacles that are hard to overcome. About half of small businesses aren’t successful during the first five years and one of the biggest reasons is excessive debt. Before you start a small business, you want to have enough saved to deal with a lot of the expenses so you can avoid loans and credit cards. Even as your business starts to grow, you still want to be conservative about your spending choices. If you keep your spending to a minimum, it can be much easier to navigate both low and high levels of growth without a lot of losses. When you are starting a small business, you also want to have some money on the side to meet your needs and not be reliant on the new business for your income. Creating a budget and sticking to it can allow you to make the right choices.
Don’t Ignore Tax Debt
Early on, your taxes may be simple but as you earn more income or owe more money, things can be come harder. It’s always best to make tax payments a priority even before they are due to avoid any major problems. You should be paying your tax bill over non-essential bills or payments that you can make at a later time. The penalties of not paying your tax bill can add up very quickly. If you aren’t able to manage the bill or have some overdue payments, speak with the IRS or ask about an extension or partial payment.
Don’t Drown In Your Debts.
Learn How to Swim.
Debt on Your Home or Car
While a home or a car is can be a necessary expense, you still want to be careful about how much debt you are taking on. Understand your debt-to-income ratio. While you need to be at a certain amount to qualify for a mortgage, you should be at an even less amount if you truly want to avoid debt.
When it comes to cars, consider paying cash for one or look at used cars. The difference between a new and used car can be around $13,000. In order to find a used car that won’t cause you problems, you should read any reviews you find. While paying cash can seem hard to do for a car, you can do it if you pay attention to savings. This is one way you can learn how to avoid debt and prevent high payments, where it’s difficult to stay afloat.
Build an Emergency Fund
One of the main things to consider when it comes to learning how to avoid debt is having an emergency fund. Aim to start saving a six-month cushion as soon as possible. If you are hit by an unexpected loss, such as a major car repair or medical expenses, this can be a lifesaver. An emergency fund can help you learn how to avoid debt. Even if you are just putting aside a little bit each month, by the end of the year it’s something. Whether or not it’s a full emergency fund of three to six months will be less important than the act of saving.
However, you do want to have a full-fledged emergency fund before you start putting money toward other purchases. Less than half of people in the USA have put aside around three months worth of emergency money in order to deal with potential disasters. Be smart about your money. Save on time. One of the best ways to do so is to open a savings account.
Only Buy What You Can Afford
This may seem like a simple concept but credit card debt runs rampant. If you aren’t sure if you can afford something, don’t just pull out the credit card. It becomes way too easy to just swipe it and not deal with it until the bills start piling in. In order to only buy what you can afford, you should work with a budget. You can use the 50/30/20 guideline as a rough guide when creating your budget. This guideline says that you should limit your must-have expenses to 50% of your income after taxes. These must-have expenses include food, shelter, utilities, childcare, insurance, and minimum loan payments. This can also help you gauge debt. If the new payment will still keep you under this 50% mark then you can possibly afford it. The 30% of your income is for luxuries, such as vacations and eating out. The rest of the 20% of your income is for paying down debt and saving.
Avoid Balance Transfers
Balance transfers can seem like a good idea but they usually aren’t. These involve shifting your credit card debt to a card that has a rate of zero. In some cases, this can work, but in many other cases, it just makes the situation worse. If you are able to eliminate or pay down your debt then it doesn’t make any sense to try a balance transfer.
Make Payments on Time
Making your payments on time is especially critical for credit cards but you should try to be making all your payments on time in order to protect your credit score. If you miss a deadline on a credit card payment, you get high interest charges, as well as fees, and it can be a never-ending cycle of debt. It’s best to use your credit card for convenience and not actual credit and be able to pay off the balance in full every month. If you aren’t able to do this then you are likely buying things you can’t afford and need to evaluate your budget. If you just pay the minimum payment every month then you will be paying hundreds or even thousands in interest every year. Carrying a high balance on your credit card bill will also not look good to lenders if you are trying to get other loans.
Limit Your Credit Cards
If you are already in credit card debt, the solution is not going to be getting more credit cards. That strategy is just a short-term fix that will lead to even more problems. While it can be a good idea to have a few credit cards that you use carefully, the key is to keep your credit card utilization down as a good sign to lenders. The rule of thumb is that you don’t want to spend more than 30% of your credit limit. For example, if your credit limit is $1,000 then don’t charge more than $300.
Pay with Your Debit Card or Cash
Getting into the habit of paying with your debit card or cash can be a great way to learn how to avoid debt. If you are using these methods of payment, this means that you have the funds available to pay for the product. This teaches you how frivolous some purchases are and can help you with self-discipline. Many people decide to choose debt instead of going without something so the problem keeps growing. By sticking with this strategy, you will know where you can draw the line.
Research Major Purchases
At some point, you are going to have to make a major purchase, whether it’s a new appliance or a vehicle. It’s common sense but you should research these purchases in order to save the most amount of money. It’s especially important to compare prices. Researching may allow you to wait for a sale or you may find a better product at a similar price. Researching also allows you to understand value. Be sure to benefit from the research and do your homework instead of just jumping right away. For major purchases, you may come across offers like interest-free financing or “buy now and pay later.” You should avoid these since these offers usually just postpone debt.
Track Spending
One way to learn how to avoid debt is by tracking your spending. While it’s important to be tracking your credit card spending, you could be taking it a step further and tracking all of your spending to know where your money is going. Credit cards and even just swiping your debit card for small purchases can make it easier for impulse purchases. If you are able to keep track of what you are spending, you can learn some lessons and be better at managing your money. Since the trend is to go cashless it’s hard to know what you are spending without actually seeing your cash leave your hand. Spending some time tracking it can allow you to make better financial choices.
Avoid Credit Scams
A way to avoid creating more debt is to watch out for credit counseling or credit repair scams. These scams can promise you a get out of debt plan. Companies will try to appeal to those with bad credit and promise that, for a fee, they can help clean up their credit reports so they can get a mortgage or car loan. Consumers then pay hundreds of dollars in fees and the companies may not even do anything to help clean up credit. These people don’t end up in a better financial situation and now have more debt to pay off. In order to avoid these scams, pay attention to promises that sound too good to be true. There are reputable agencies out there that can help you with your debt and your credit score. Non-profit ones are usually the best choices but it’s best to avoid paying any fees up-front for services. Be sure to confirm payment with creditors so that you can make sure the agencies aren’t just running off with the money and are in fact helping you pay down your debt and improving your score.
What Are the Signs of Credit Card Debt?
If you are looking at how to avoid debt then it’s important you also know when you are in debt. There are some clear signs that you are in credit card debt. Knowing these signs can help you address some problems before they become even larger.
Creditors are constantly calling you.
You are only making minimum payments.
Your credit cards are constantly maxed out.
You have been rejected for new credit.
Your bank account is usually low or almost at $0.
After you pay bills, you don’t have money for any basic extras, such as ordering food.
You have used paycheck advance services.
Be Careful with Education Debt
Student loan debt can be very high and while an education is important, there are ways to also avoid taking on too much debt from education.
-
Since education is so important, sometimes you have no choice but to take on debt. This doesn’t mean that you can’t be careful with it and limit the amount you are taking. If you are able to take on less debt and get a part-time job while in school then you will be paying a lot less in interest and not starting off your career with payments you can’t afford.
-
Too many college students are using their student loan money on food, furniture, or consumer goods. Instead, you should only be spending the money for education related expenses, such as textbooks and tuition. By spending the money on non-education related expenses, you are only going to increase your level of debt.
-
Tuition costs for four-year schools can be very high and there can be different economical ways to also get an education. Two-year schools, technical schools, and community colleges often have similar programs at a much smaller price tag. There is also the option to attend a community college and transfer to four-year colleges to still get a degree from the college of your choosing.
-
If you take advanced placement classes while still in high school, you can get college credit and you don’t even have to pay for the cost of tuition. In addition to taking AP classes, you can also enroll in a community college on the side to get even more credits to transfer.
-
Your major will matter. It helps to have a degree that will get you hired. Science, math, and computer-related majors can usually get hired quickly after graduation. If you want to have a degree in humanities or something less marketable then you can augment this with a more job-specific minor.
An example would be a mass communications degree with a minor in finance. Another thing to consider is you don’t have to go to an Ivy League school, which usually has higher tuition, in order to be hired.
-
It’s much easier to get student loans and it takes work to find grants and scholarships but this doesn’t mean you shouldn’t give it a try. There can be scholarships available for academics, skills, or special talents. There are also grants available from the state and federal level for low-income students. Even if you do get aid, you should always apply for more after completing your first year of school.
In Conclusion
Getting serious about how to avoid debt is an important life skill to have. There are a number of ways that it’s possible to avoid debt, as long as you pay attention to what you are spending and don’t carry balances on your credit cards. When it comes to education, mortgages, and car loans, you need to be smart about the money you are spending so you don’t get into deep financial trouble, even though these are important purchases. Learning how to avoid debt is a process and requires some dedication.