Maybe you click on this post already having debt and wanting to avoid taking on any more. Or might be that you never had debt and want to make sure you never get any debt.
So how do you avoid debt? Well, there are a few ways to go about it.
Plan for things to go wrong
An important part of avioding debt is being prepared for things to go wrong. So plan in advance for all your annual expenses like taxes and insurance. But also, have some savings for if your car breaks down or if you were to lose your job.
The point is to build up a cash cushion for you to fall back on in hard times so you can avoid being forced into debt.
The second part of being prepared once you have the cash coming together is to plan for what you’re going to do in hard times. Don’t just save money for when you lose your job, plan for how you are going to use your money once you lose your job.
I am building up my emergency fund for when I lose my job. and I also made a plan. My plan if I were to lose my job is to live like normal for the next month as I am a month ahead on things. During that month I start looking for a new job.
If I’m still not employed after the first month I go into cut my budget mode. I’ll make a few cuts to reduce spending and continue to look for a job.
At the end of the 2nd month with no job, my budget goes into survival mode. Any non-essential things are removed and money is only spent on the basics.
Depending on where I’m at with the job hunt and how close I am to an actual job that I want. it might be time to consider taking a temporary job to bring in some cash.
When I lose my job I have a basic plan of what I’m going to do. I know how long I can live at my current level, when I need to start cutting expenses and when to lower my standards.
Don’t live paycheck to paycheck
As referenced above I am a month ahead on all my bills so I’m out of the paycheck to paycheck cycle. That means if something horrible were to happen this month I would have time to react.
Because after all the money coming in right now I won’t use until my next month.
When you’re living paycheck to paycheck everything becomes an emergency you must react to. What are you going to do if your income drops? How would you react?
Being a month ahead on your bills makes a huge difference to your finances. It buys you time when bad things happen. It gives you more options. And things stop being an emergency because you already have the money.
Know when a need becomes a want
If you’re purchasing something expensive you need to think long and hard before you buy it. Do you want to spend all the money you currently have saved and destroyed your safety net?
In those situations, you need to think do I need this? If you’re struggling to pay for it or have to put it on a credit card you don’t need it. Unless its something crucial to your survival don’t get it.
For bigger things like a car or a house, you might need it but do you need this one?
Buy an older car and pay cash for it. Or find a smaller apartment that would be cheaper. Not everything you buy needs to be top of the line.
Pay cash for everything
If you have struggled in the past with debt avoid temptation. That might mean not having a credit card, line of credit or even avoiding all loans.
Try to pay for things with cash with whatever money you currently have in your account. Leave your credit cards at home. This will increase your awareness of your spending and help you to avoid debt over the little thing.
It comes down to only spending the money you have and not giving yourself ways to spend someone else money.
Know the difference between good and bad debt
Before you take on any debt think about whether it’s good or bad debt. A good rule of thumb to use when deciding is will this make me money in the future.
If it not going to make at least enough money to pay off your debt it’s bad debt. That would include credit cards and car loans while good debt would be mortgages and student loans.
And whether it good or bad debt also depends on the situation.
Having a large student loan for a field with low average salary is not a good situation. Then the student debt becomes bad debt if you are not going to be able to pay the loan off with your salary.
Who are you getting your debt from + how much does it cost
Nowadays you can get loans in lots of ways without even going to a bank. Remember the only reason someone you don’t know is giving you a loan is to make money.
Avoid payday lenders like the plague. They have such high-interest rates once you start using them it’s almost impossible to break the cycle.
Don’t ever carry a balance on your credit card. If you are struggling and must take on debt try to work with a bank. Or at least do the math on how much the loan will cost including the interest. The results won’t be pretty.
I mention if they don’t know you they are only loaning your money in hopes of making more in return. That doesn’t mean you are allowed to take loans from people you know.
Debt ruins relationships no matter how strong it might be today. Avoiding taking any debt from people you know or for people you know. That includes co-signing loans which make their debt your debt.
Hopefully, this gives you something to think about. Remember if you don’t want debt, plan ahead and makes sure you actually need something before you buy it. And if you have to go into debt try to use a bank.
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