With the fallout of the recent economic crisis heavy upon us, more and more people are beginning to understand the importance of crawling out from under the blanket of debt in which they have so cozily wrapped themselves during the last decade. But doing so is easier said than done. Some have dug themselves into so deep a hole that the prospects of climbing out seem almost impossible, and if they do, many quickly find themselves rapidly falling back in again.
So how do you stay out of debt? Well, the process is not always simple, but by considering the following tips, you may find it easier to keep the spectre of debt at bay. Moreover, if you focus upon cleaning up your finances, you may find yourself living without the often financially crippling effects of debt.
1) Track Your Spending. It is advice that been given and written about in hundreds of finance related articles, but we money people just can’t preach it enough. Tracking where and upon what you spend your hard earned dollars is one of the best ways to become accustomed to your personal finances. Once you understand how your money is being utilised, you can use that knowledge to help you stay out of debt.
2) Understand Your Finances. One of the major steps in staying debt free is having a good understanding of your finances and financial position. Knowing your actual income after taxes, retirement, health benefits, and any other miscellaneous deductions are subtracted, as well as your total monthly expenditures can help you make informed decisions when it comes to how much money you can actually spend each month and avoid incurring debt. It is also crucial that you understand your current asset and debt allocations in order to reduce or eliminate outstanding debt and maintain a debt free status.
3) Be Aware of Debt. Closely related to understanding your finances, is the awareness of debt. Being aware of debt doesn’t just mean knowing how much you debt you have and what type of debt it is (i.e. mortgage, car loan, credit card, home equity line of credit, etc.). It is important also to understand how debt grows, is reduced, and how much it costs you in interest each month to hold. Truly being aware of how costly debt can be is often crucial to helping you avoid taking on more of it.
4) Abide by a Budget. Here, I don’t just say ‘create’ or ‘use’ a budget, because doing so is easy. It is the actual act of ‘abiding’ by a budget that is an effective means of helping you avoid debt. Abiding by a budget can mean that you understand and are aware of your financial situation, that you are interested enough to pay attention to your money, and are willing to work to avoid debt.
5) Create a Reserve. Being financially prepared for an emergency or for the unexpected can be one of the best ways to keep you out of debt as well as decrease stress and give you peace of mind. While the amount you’ll need for your reserve can largely be determined by your personal financial situation and spending habits, I always say, the more, the better. Some financial gurus advocate having $500 in a savings account. While that is certainly a start, $500 won’t get you far if your car, home or health insurance deductible is $750 or you need to replace the furnace in your home or your car’s transmission.
6) Reduce Credit Card Use. While credit cards often take quite a bashing in the headlines, they aren’t always the tools of the devil that we make them out to be. Like a gun, a credit card is just a tool until placed in the wrong hands or situation. Reducing the number of credit cards you have available to get you into debt, could be compared to reducing the number of loaded guns you have lying around your home just waiting to go off.
7) Pay With Cash. Without the ease of swiping a credit card for every purchase, you may be forced to use more cash. This is a great way to watch your expenses and truly get a feel for just how much cash you are actually spending. Watching those bills slip through your fingers and remembering how hard you had to work to get them is a great way to help you stay out of debt.
8) Direct Deposit. If you are prone to spending a large portion of your paycheck as soon as you get it, it might be a good idea to consider having it put directly into a savings account. Consider dividing a portion of your check to go into checking, for bills, mortgage, and other expenses, and another portion to go into a savings account where it won’t be touched, unless it is for emergencies. This is an easy way to keep yourself out of debt with very little effort on your part — just don’t dip into that savings account too often!
9) Utilise Store Sales, Discounts, and Coupons. Another good way to stay out of debt is to decrease your spending. While this sounds simple, it might not be as easy as you might think, or, if it is at first, it might be difficult to maintain. Learning how to make use of coupons, store sales, discounts, and similar methods of savings is something that can help you stay out of debt.
10) Understanding a Mortgage. It is amazing how many of people don’t completely understand what is probably one of the most significant sources of debt in their lives – a home mortgage. And it isn’t always just about understanding the terms of the loan. The agreement you’ve legally bound yourself to is certainly important. But to help you rid yourself of this debt as quickly and cheaply is possible, it is also critical to understanding the total amount you will be paying over time, how to reduce that amount through extra payments, as well as any tax benefits regarding the interest you pay on your mortgage.
Mark Brown writes about personal finances for Credit Card Compare, an Australian website that makes it easy to compare and apply for credit cards such as rewards credit cards and low interest credit cards that make your money work harder for you.
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