Step 7: Avoid future debt
So far, this series of articles has covered how to get out of debt. The rest of the series will teach you how to stay debt free, stop living paycheck to paycheck, and start saving and investing for retirement. If you’re still working to pay off your debt, feel free to read on because these are principles that can help you now, but I also recommend bookmarking this page or printing it out for future reference.
In this section, we’ll look at how to avoid debt. The easiest way to learn how to stay out of debt is to see how you got into debt to begin with. For most of us, it falls into one of two categories, or possibly both. The first category is for being impatient and spending too much. This is a real problem, especially with the current generation. We believe that we should now have what our parents worked for 50 years to obtain. Easy access to credit cards has helped fuel this problem. Most of us get our first credit card around college age, when we’re least prepared to handle them, and get into the habit of spending about 20% more than we earn each year. Very often, we end up having to pay for items that we no longer use or even own.
The second category is for unforeseen or unplanned circumstances. Sometimes we use credit to finance a wedding, buy Christmas gifts, or other big events that we know are coming up, but didn’t plan. Other times, it’s unexpected circumstances, like having to replace an appliance or a car that needs repairs. Regardless of the cause, there are steps you can take to protect yourself from having to go into debt to cover them.
If your problem falls into the first category, my advice to you is to just drop it. If you see something that you absolutely must have, you can take the time to save up to buy it, instead of buying it on credit. You may think that the second cause is inevitable, but there is actually a very simple solution: keep a backup buffer for unforeseen circumstances.
Most of us live paycheck to paycheck and anything that goes wrong and costs us some extra money can cause stress, panic, and sometimes means we won’t be eating anything but ramen noodles for a few weeks. Having this extra savings cushion will help you eliminate this stress and help you live a more stable lifestyle.
I recommend saving about $1,000 – $2,000 to start, and I also recommend putting it in a separate savings account, so you won’t be tempted to spend it except in emergencies. You want to make sure you keep this money in a savings account instead of investing it; that part will come later. If you were to put this money in a CD, you would not be able to access it in an emergency without paying a penalty. If you put it into another type of investment, like a mutual fund, the price may have fluctuated to the point where now is a bad time to sell your stock, at the very time you need the money, causing you to lose money. in investment. . There may also be a waiting period to get this type of money invested. This buffer is for emergency use and needs immediate access to funds.
In addition to this emergency fund, you should save for major purchases, like a car. If your current car is paid off and you’re no longer making active payments on your other debts, open a separate savings account and start “making your car payment” into these savings accounts. If you do this over a number of years, when it comes time to buy a car, you can take money out of this account to pay for it in cash, or at the very least make a decent down payment.