Having debt can often seem like an easy way to afford things that are otherwise too expensive. But in many cases, it’s a trap not worth falling for. Having too much debt can be a heavy financial burden and cost thousands in unwanted interest payments. Here are some simple tips to avoid or minimize your exposure to debt.
Cash Is King
Establish a monthly or weekly spending limit and then withdrawal that amount in cash from your bank account. Then, only allow yourself to spend that cash you’ve withdrawn – never more. Consider putting the cash into weekly envelopes. Once the cash is gone from a given week’s envelope, you can’t spend any more. This will force more careful budgeting and make sure you are spending less per week than you are taking in as income.¹
Credit Is A Fallback—Not A First Choice
Having a credit card can be a good idea for a number of reasons including travel benefits and the option to earn reward points if you need to make a major purchase, but it should be regarded as a second-choice and fallback, not a first option if you are trying to avoid debt.
Credit cards are one of the main ways that people stop keeping track of their money and fall into debt so be careful in becoming overly casual about using them.¹ Americans owe upwards of $900 billion on their credit cards: that’s around $9,000 per American household.²
Don’t Overspend On Food And Entertainment
Going out to movies, theater shows, concerts, and festivals can be a lot of fun, but if you do it a lot it can also start to really add up. The same goes for eating out at restaurants. Even medium-priced family restaurants can start to make a dent in your finances once you add in drinks, tax and tips. Start treating your money as a limited resource rather than an afterthought and consider only going once a week to a restaurant or entertainment event. The savings are going to be considerable.³
Watch Out For The Big Debt Items
As much as everyday expenses, entertainment, eating out and spending on unnecessary things can become a debt trap, it is also very important to watch out for the big debt items: mortgages, car leases, student loans and personal loans. While it is sometimes necessary to become involved with all of these, you can limit your debt by choosing a house and car within your price range or attending a college with lower tuition. If that is not an option, consider borrowing money directly from a family member to avoid the burdensome interest payments. Students in America currently owe more than $1.3 trillion in debt, so it is a huge debt burden for far too many people just trying to start out in their life and career—one that you are best off avoiding as much as possible.⁴
Even though it might seem like a cliché, as mentioned in the first tip, budgeting and figuring out your limit—for the year, month, week and even day is a major way to avoid debt. Especially before major financial decisions, take a look at your short and long-term budget to make sure you don’t overspend.
You don’t need to be an accountant to make a budget, just do your best to open a spreadsheet and calculate your main expenses and then your source(s) of income and go from there.⁵ One of the most common and effective budgets is the 50-30-20 budget. What it means is that 50% of your income goes to expenses that are unavoidable such as utilities, housing and food, 30% can go to eating out, entertainment, buying a new pair of shoes you like and so on, while 20% is only to save, pay off existing debt or use in an emergency and should never be spent in other situations.⁶