Tuesday, April 6, 2021

How To Avoid Debt (and What To Do If You Can’t)

Debt avoidance is much better than debt management. Here are some tips from a reader on how to act to prevent getting into debt and the best course of action to follow if taking a loan is inevitable.

Debt is one of the most dangerous financial situations you can find yourself in. There are several causes of debt: unexpected costs, expensive life events (like moving house), or poor money management. Some of these causes are unavoidable, while others can be planned for. Either way, you want to avoid debt at all costs.

If you go into debt, you will find your lifestyle changed. In the short term, debt can lower your credit score, remove your ability for financing, and even cause creditors to bring lawsuits against you.

In the long term, the effects can be even more disastrous. It can take years to pay off debt, which means years of restriction, tight budgeting and poor emotional health from the strain. If a lawsuit is brought against you successfully, the consequences you may face could follow you around for years.

In summary - avoiding debt is paramount.
Strategies to avoid getting into debt

Often, people can avoid getting into debt; they just don’t know how to do it. Most of these tips are preventative measures. If you find yourself in immediate need of money, avoiding debt can be more challenging.

1. Be realistic about your spending

If you need a credit card to afford something, you can’t afford it. Don’t buy it. Credit cards are a great idea but are actually dangerous in practice. Knowing there is a magic card that can buy you things you can’t afford is attractive. It’s often difficult to be realistic when you have a credit card. But you’ve got to remember that you are paying with your own money - your money in the future. If you can’t afford it right now, don’t use a credit card to buy it.

Credit card debt is one of the easiest forms of debt to fall into. Don’t make a mistake so many already have.

2. Budget everything

As the opposite to the previous point, budget everything. Ensuring you don’t spend on things you can’t afford is essential, but you’ll only know what you can’t afford if you do a budget. Most importantly, once you’ve made your budget: stick to it!

If possible, budget in an amount to put into savings each month. This will help you avoid debt in the future, in case of any unexpected costs, like medical bills.

Making a clear budget will also help if, in the future, you need to cut down on spending. You can see areas that might not be necessary or areas you’ve budgeted more for than you actually use.

3. Have an emergency fund

Emergency funds are stores of cash that you can fall back on if hard times unexpectedly appear. It’s recommended that your emergency fund consists of at least six months of your salary. Therefore, if you lose your job or can’t work for medical reasons, you’ve got enough money to cover your expenses for a while without going into debt.

4. Focus on necessities over wants

This is a classic spending tip. If you look at your spending habits, you’ll find plenty of unnecessary splashes. Trying to find places where you can cut down on wants in favour of necessities can help keep your spending in check. This isn’t to say you should remove all wants. Finding luxuries that aren’t as costly can be an excellent way to still enjoy little spends, without them causing a big dent.

5. Find ways to save on the essentials

You can’t stop spending on the essentials - if you cut down on food, you’ll starve. But there are ways to make these expenses cheaper. With food, you can look into coupons to minimize the overall cost of your weekly shop.

Similarly, using price-comparison websites for essentials like water and gas can help to find cheaper options for your budget.

6. Use credit cards wisely

Credit card debt is one of the easiest types of debt to slip into. In order to avoid it, not using credit cards at all is the best way forward. However, this isn’t always possible. Sometimes there are moments when you’re going to have to use credit cards. In these cases, it’s essential to make sure you use your credit cards appropriately.

Use as few cards as possible: If you have multiple cards, you’ll have multiple streams to pay back and more interest to pay than if you limit the number of cards you have.

Don’t use your credit cards to get cash in hand: this is a sign you have developed bad spending habits. You’ll be charged a fee for this behavior, and the ARP is higher than it is on everyday purchases.

Pay off your credit card balance ASAP: It sounds obvious, but it is critical. Ensuring you pay off your credit card balance in full as you go is the only way to avoid debt. Once you’ve made a big purchase with a credit card, make a deadline for yourself to pay it all off by. Ideally, this would be the next day. Don’t go longer than a few weeks to avoid trouble.

7. Managing pay rises appropriately

So you’ve got a pay rise: congratulations! This might tempt you to spend on that costly treat you’ve had your eye on, or to take up a membership that you couldn’t afford before.

Actually, one of the most innovative things to do when you get a pay rise is to continue spending in the same way. You could live off your previous pay, so why spend more money? If you stick to the plan you had before, you’ll save so much in no time at all. All of these savings will help you out when avoiding debt.

Strategies for when debt is unavoidable

As outlined earlier, there are some situations where getting into debt is unavoidable. Whether this is due to medical or dental expenses, and unexpected cost or due to poor money management, there are times we all face debt.

1. Choosing the right loan

Often, we will have to turn to loans to pay for these expenses, which will then lead us into debt. But just because you have to be in debt doesn’t mean you have to be in intense levels of debt. By choosing the right loan, you can minimize the cost to yourself and make repayment smoother.

The right loan will depend on the type of cost you are facing. For example, finding out what can you use an installment loan for will tell you if that’s the loan for you.

Pay particular attention during your research to the interest rate. This will affect how much extra money you’ll have to find to pay it back.

Looking into debt consolidation loans could be a good way forward. These loans let you pile multiple forms of debt into one lower interest rate loan. This type of loan is popular with those in debt.

2. Make a repayment plan

Much like you should make a budget when in and out of debt, creating a repayment plan is essential. It’s like a budget for your debt repayment. This way, you know how much you need to pay into your debt each month. In turn, this will allow you to manage your everyday spending to avoid any more debt.

By making a repayment plan, you should also know how long it will take you to pay off your debt. This will help you to plan your money management long term.

3. Stick to your good money management habits

Earlier in the post, good habits for money management were discussed as a way to avoid debt. These same tips should be followed when in debt - it’s maybe even more important to stick to them when you are in debt. To avoid racking up even more debt, you must be smart with your money. Otherwise, you can only do more damage to yourself.

12. Avoiding debt can seem challenging, but it’s worth it in the long run

Being in debt is a nightmare situation. It can feel like you’ll never get back out of it, and it can feel tempting to give up on your good money habits. But to get out of debt, you need to be resilient, diligent and willing to stick to your plan.

In order to avoid this, preparing by setting up good habits is the only method that will work. You might want to give up, but thinking of the difficulty you could face should motivate you through the hard times.

Ensure at all times you are aware of the money coming in and out of your bank account and your own spending habits. The only way to fight debt is to know what your money is doing at any given time. It can help to use professional services to avoid debt, but this isn’t an option for many low-income earners. Try using free services like blogs and online help sources to educate yourself as best as possible.

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