You’re on the ground floor, you have no previous planning, and you have your own share of debt. Following are eight tips on how to avoid debt, and set yourself up to become healthier financially.
Long-Term Should Be Your Focus
We are by our nature, short-term thinkers. We live in a world of short-term satisfaction, with short-term goals, and short-term expectations. Seldom has a short-term accomplishment ever brought lasting satisfaction. Relate this to impulses. How much of your debt is the result of impulse purchases? How many of those purchases were charged? If you are like me, and 99% of the population the answer is; too many.
There are no quick fixes, just as there are no easy paths to discipline. Learn to think long-term, and before you know it your goals will be realized.
The Emergency Fund
You’re drowning in debt. Collections are calling. This honestly has been going on for far too long. Familiar? Have you ever heard the old saying, “Pay yourself first” when perusing the wisdom of financial gurus? That’s because all of them know this is the most important principle of all.
However, in setting yourself up for long-term financial success, that payment is best used to build an emergency fund. Why? What is the function? Preparedness. With an emergency fund intact you won’t be using credit cards, or other forms of interest-gaining debt to pay for that emergency car repair, or medical expense!
After you’ve saved up a good emergency fund, somewhere between $5,000 and $10,000 (it’s feasible I promise), then pay yourself for the long term.
Charge Only What You Can Afford
What does that mean? It means that if you cannot go home immediately after the credit card purchase and cover the charge with cash from your checking or savings account, don’t charge it! It means that if you cannot pay off the balance by the end of the month, don’t charge it!
Few people understand the impact a high interest rate can have. Although credit card APR averages between 12 and 15 percent, if you are like me you have accounts that gather 20 to 27 percent interest. Keeping it simple a $1,000 balance will gather $13 every month, at 44 cents per day. That is simply money lost.
Do Not Miss Payments
Penalties make banks and credit card companies billions per year. Often the penalty for late payments is equal to or greater than the minimum payment. You’ve officially been set back a month and a half on paying off the balance. Don’t miss a payment!
Avoid Cash Advances
If you have to think about taking a cash advance on a credit card you can be assured that you are in trouble. Cash advance fees are exorbitant. This is another reason to work on your emergency fund.
Limit Your Accounts
Whether you are in good financial shape or not, limiting the amount of accounts you have is always wise. Less accounts is equal to less debt because there is less temptation to spend.
Pay With Cash
Statistics say that you are likely to spend up to 30 percent more if you are using plastic, or checks, as opposed to cash. You can see and feel your money leaving your hands. That feeling cannot be had without serious effort when using your credit cards, or checkbook.
Challenge yourself. Use cash for one week. At the beginning of the week calculate how much you will need to get through the next seven days. If you have habits like a cup of coffee every day, put that in. Live your week. At the end of the week do you have excess? Did you have to take out more? Why? What did it feel like? Have you noticed a difference in how you feel about your money? Good. Think on that.
The extra hours you invest in shopping for the best deal on big purchases is worth the time. In addition to saving you money, it also teaches you to become aware of what kind of products, and features are out there. It teaches you to be patient. It teaches you to think in the long-term, and be patient with your purchases, instilling discipline that counteracts the impulse purchases that make us act irresponsibly with money.
And always pay cash where feasible; TVs, furniture, electronics, or lumber for a new deck. Pay cash, or practice patience and discipline until you can pay cash.
There is a satisfaction that comes from having control of your finances, even if you are still entertaining loads of debt. This satisfaction gives you a feeling of security, of peace, and accomplishment. It lets you know that no matter your income, you have control, and you belong to a select group of people rare in these times of short-term gratification.
This post was written by Amy Matt who loves to explore things which are finance related or frugal. It gives her a sense of empowerment. She is so glad to be guest posting here today.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.