While you don’t have to treat debt as an enemy, it can significantly affect your financial health if poorly managed. Some credit card debts with sky-high interest charges do you more harm than good, and you are better off without them. Here are a few tips to help you avoid getting into debt.
Establish a Spending Plan
Developing a plan for every coin you earn can help you avoid overspending and ensure that you spend less than you earn. It’s often easy for overwhelming credit card debt to sneak in if you have a habit of making purchases that are more than what you earn each month.
When creating a budget, consider sectioning your spending into wants and needs as well as long-term and short-term financial goals. You can use a two-account plan whereby you allocate one account to fixed expenses like paying rent and another to discretionary spending, such as trading SOL to USD. Still, refrain from engaging in forex trading with money intended for fixed expenses. Another good spending plan is the zero-based budget. With this, you ensure every dollar you make has a purpose, enabling you to track where every coin goes.
Develop an Emergency Fund
Setting up an emergency fund is a perfect way to avoid debts. Life can be unpredictable, and when you least expect, expenses can pile up quickly, draining your bank account. With an emergency fund, you get a savings cushion if you happen to lose your job unexpectedly or your work is seasonal.
Besides that, you can use an emergency fund to offset unexpected expenses, like a medical bill or urgent car repair. This will help you avoid getting into credit card debt that may take you several years to clear.
Automate Your Savings Routine
By automating your savings strategy, you can easily set aside enough money for future financial goals while developing a solid emergency fund. Additionally, you are less likely to use your savings and land into debt if you automatically separate the finances from your checking account.
Consider enabling automatic money transfers to your high-yield savings account, a retirement fund, like 401(K), and an emergency fund. The ideal amount to save largely depends on individual needs and circumstances. Even so, you can use the 50/30/20 budget rule as a guide. With this, you ensure about 20% of your after-tax income goes to savings.
Clear Credit Card Transactions Immediately
Since credit cards offer the flexibility to clear the balance over time, you may be tempted to pay for items you can’t afford at the time. This can lead to a huge credit card debt, way above your monthly income.
To avoid debt, treat your credit card like a debit card. Only purchase items you can afford to pay for with the amount in your checking account. This will also help lower your credit utilization and strengthen your credit score.
Only Borrow an Amount You Need
Whether you are looking for a mortgage, car loan, or just a personal loan, take the smallest loan possible to meet your goals. Avoid taking a huge loan without a clear plan of how you intend to use the money. Consider making a sizable downpayment on a mortgage or car loan to reduce your regular monthly payment.
Let student loans be a last resort for paying college school fees. You can only go for such loans if you have exhausted state, federal, and school grants, work-study funds, and private scholarships.
Start keeping your debt in check with these actionable tips. Develop a spending plan and stick to it while ensuring you clear your credit card balances each month. Also, try to avoid impulse purchases, as they can derail your financial goals.
My Life, I Guess is a personal finance and career blog by Amanda Kay, an Employment Specialist and older millennial from Ontario, Canada that strives to keep the "person" in personal finance by writing about money, mistakes, and making a living. She focuses on what it’s like being in debt, living paycheck to paycheck, and surviving unemployment while also offering advice and support for others in similar situations - including a FREE library of career & job search resources.