How to Avoid Getting into Debt in the First Place
It seems like summer always becomes the most expensive month of the year for my family. Between summer vacations, landscaping projects (why are rocks,...
It seems like summer always becomes the most expensive month of the year for my family. Between summer vacations, landscaping projects (why are rocks, found in nature, so expensive?!) and more… Yikes. It's easy to slide into debt. The truth is, no matter how savvy of a trader or investor you are, you can still end up in debt.
When these extra expenses come rolling around, I need to add a few mental checks and practical preparation to my repertoire so I can avoid the summer slide. I thought they might help you as well.
Here's how not to let that gorgeous back patio trigger a few panic moments.
Tip 1: Don't buy it if you can't pay cash.
No matter what "it" is, don't buy it if you can't pay for it with a wad of cash. My dad taught me that simple trick when I was a kid.
It's such good advice that it bears repeating: If you don't have the money for it or you're tempted to buy it on credit, don't buy it at all. A credit card might make you think you have the money for a couch, new TV or an expensive phone, but you still have to pay back that money later. It's a simple lesson, but it's one that so many adults never learn. No matter how much money you earn, you can still get caught up in this need to have more "stuff" — and can still go into debt.
Tip 2: Fluff up, don't flub up, your emergency fund.
Experts recommend that you beef up your emergency fund to the tune of three to six months' worth of living expenses. Put another way: Have at least six months' worth of salary saved up. This will help you if you lose your job or encounter another emergency that causes you to need money quickly.
You might scoff at the idea of building up an emergency fund if you have plenty of assets. However, how liquid are those investments, really? If you've got money stashed away in an IRA or another type of non-liquid asset, you could pay penalties to take your money out. You may not want to do that because it could set you back even more.
Tip 3: Pay off your credit cards every month.
This kind of goes back to the first tip. Don't charge what you can't afford to pay back. You probably already know about the damaging cycle of high interest rates over the course of time. But did you know that carrying a high balance on your credit card also affects your credit utilization ratio?
Credit utilization refers to the amount of credit you have used compared with how much credit a lender gives you. That ratio helps determine your credit score. In other words, if you have a $10,000 limit on your credit card but consistently charge $9,500 on your credit card every month, you'll have a high credit utilization ratio.
The general rule of thumb involves keeping your credit utilization as low as possible — around 30% — and even less is better.
Oh, and by the way, never, ever use your credit card for cash advances. What a money pit!
Tip 4: Get your needs vs. wants straight.
Got a clear idea of your wants versus your needs? For example, I just bought these super cute outdoor pillows for my front porch. I thought I "needed" them because one of my neighbors has (guess what?) super cute pillows on her front porch.
I ordered them anyway. However, could my adirondack chairs survive without the super cute pillows? Of course. (I don't even actually need adirondack chairs, either.)
The more you get clear on needs versus your wants (no boat versus new boat) you will start to cull the debt creep. Does that mean you never satisfy your hunger for the things you want? Of course not! Take a look at the 50/30/20 rule below for more information.
Tip 5: Standardize your budget.
Make budgeting so normal and such a part of your life that you never buy anything without checking the budget first. Why not try the 50/30/20 rule for budgeting to get started? Here's how that works:
- Allocate 50% of your income toward needs (these could include groceries, rent/mortgage, utilities, car loan or other transportation costs, insurance, child care, child support, alimony, etc.)
- Allow 30% of your income to go toward wants.
- Put 20% of your income toward savings and repaying debt (toward your emergency fund, retirement fund, excess debt and more).
You don't have to categorize all of this by yourself. In fact, just go straight for the budget app. A great budget app should connect your checking, credit and savings accounts and automatically categorize your recurring expenses. Good budget apps also give you some goals by creating custom categories for short- and long-term goals.
Tip 6: Don't overspend on the little things.
It's not always the boats or the new cars that get people into trouble, though those things can be major culprits. It's the little things (like super cute outdoor pillows for the front porch) that add up and end up causing credit card debt to balloon.
You may have heard of your latte factor. Every little bit adds up in the form of lattes, new shoes, golf clubs and other "little" expenses. You could cost yourself hundreds of thousands of dollars when you spend.
Don't Start Inching Toward Debt
If you get started with a clean slate, you'll never have to worry about inching toward debt from the very first day after you graduate from college. The earlier you start good money habits, the more likely they'll carry you through the rest of your life.
Just remember that you can always start over with a clean slate and get out of debt. (You can get into debt at any point in your life. After all, terrible illnesses and accidents can come out of nowhere and bankrupt you.) However, taking these tips into consideration might help you put yourself into a position where you're never underwater again.
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