One of the most common financial challenges people face is debt. According to a CNBC report in 2021, an average American has $90,460 in debt. This shows how serious the debt problem is.
Some people may spend half their lifetime paying debt while trying to meet up with other financial needs simultaneously. If you are currently indebted or want to protect your finances from debt, you must have pondered on how to avoid debt through creative and practical measures.
Thankfully, that’s exactly what this post has for you. We will carefully delve into the debt problem, examine the possible causes people run into debt, and how to avoid debt. Even if you have a debt to be paid off at the moment, you will gain some insight into how to pay it off quickly.
What Is Debt?
In finance, debt is considered the money that a person or an entity owes and is required to pay off at a given time. This often happens when a loan is taken or during a financial transaction where one party offers the other party money or anything of value with the sole intention of getting repaid after a specific time.
What Is The One Simple Principle To Stay Out Of Debt?
Based on the observations of many real-life situations concerning debt, the one principle to stay out of debt is to “live below your means“. The moment you try to pick up a lifestyle beyond your financial capacity, you would be compelled to run into debt. Thus, living below your means is a brilliant way to avoid debt.
Why Do People Run Into Debt?
There are so many reasons people run into debt, but the most common cause for debt is people’s desire to live above their means. For example, you earn $10,000 monthly and want to purchase a car worth $124,000. This is not a feasible financial goal because it is beyond your financial capacity.
If you still insist on getting this car, you may have to take a loan, incurring debt. But if you decide to live below your means by purchasing a $45,000 car, you won’t be compelled to take a loan.
Another reason why people run into debt is the mismanagement of finances. No matter how much money you earn, you will struggle financially if you don’t know how to manage it effectively. In trying to bail yourself out of your financial crisis, you may run into debt.
Benefits Of Avoiding Debt
When you know how to avoid debt, your financial status will change for the better. That is, there are some benefits you’d reap by staying out of debt. They include but are not limited to the following:
- You would make the most of your income since you know that you don’t have to transfer any money to a debt fund.
- You would instinctively learn to be prudent with your spending.
- It gives you a sense of financial security.
- You’d be able to accomplish important financial goals.
- By avoiding debt, you’d carefully watch your expenses. Hence, you won’t be a victim of impulse purchases.
Impact Of Debt On Your Finances
Staying out of debt is very important because debt can drastically impact your finances. For instance, if you accumulate a debt of over $150,000 and your monthly take-home pay doesn’t exceed $9,300; how long do you think it would take you to pay down a $150,000 debt?
It would take a long time. Besides, in the course of paying down the debt, it would be difficult for you to achieve other financial goals because a significant portion of your income is being taken by debt. This example illustrates the impact debt can have on your finances.
The Simplest Ways To Avoid Debt
The simplest method for avoiding debt is living below your means and managing your income effectively. When your purchases are not beyond your financial capability, it would be difficult for you to suffer any debt. On the other hand, if you know how to manage your income very well, it would go a long way in helping you to avoid getting into debt.
10 Best Tips On How To Avoid Debt
As someone who doesn’t know how to avoid debt, you must acquaint yourself with feasible strategies, healthy lifestyles, and unconventional tips to help protect your finances and teach you how to avoid debt problems.
Here are 10 helpful tips for staying out of debt:
1. Create A Budget
Budgeting is the bedrock of a financial goal or anything that involves spending and managing money.
Before you can have insight into how to avoid debt, you must learn how to budget your income. By budgeting your finances effectively, you would spend wisely, making it possible to avoid debt.
If you have little or no knowledge on how to create a budget, you should check out this comprehensive guide that shows you the step-by-step process of creating a working budget that suits your financial status.
With a well-constructed budget that covers all your expense for a month, you would be able to identify what you are supposed to be spending money on, other than spending aimlessly.
2. Have An Emergency Fund
If you don’t have an emergency fund, you aren’t making the right financial decision. Setting up an emergency fund is an excellent way to protect your income and avoid dabbling in debt by borrowing money.
Your emergency fund can come to the rescue whenever you have to cover emergency expenses such as medical bills, car repairs, or any other expense you don’t always prepare for.
Make it a point of duty to save a certain amount of money in your emergency fund every month. It could be 5 or 10 percent of your monthly income. By the time you maintain this savings habit for more than a year, you will have amassed a significant amount of money in your emergency fund.
3. Pay Off Your Credit Card Balances Completely
An excellent way to control your spending and avoid getting into debt is by paying off your credit card balances in full.
Sometimes, people don’t pay their credit card balances in full just because they want to reserve extra cash. But sadly, that’s a wrong decision because the more you leave these credit card balances unpaid, the more they accumulate into big debt for you.
To avoid debt, always pay your credit debt completely.
4. Spend On Your Needs, Not Your Wants
Your spending habit determines your success rate in avoiding debt. Do you spend on your needs or your wants? This is an important thing to ponder on because it shows how ready you are to grow your finances and avoid debt.
More importantly, this is one of the main reasons you need a budget. When you have a budget that lists your needs as expenses, you would only have to spend on those expenses (needs) on the budget.
This is one of the common tips for avoiding debt.
However, when you don’t have a budget, your spending won’t be guided. You might be spending on your wants (things you don’t necessarily need) without even knowing. This is not how to avoid debt, and instead, you are increasing your chance of being entangled in debt.
5. Stop Making Purchases With Your Credit Card
The reason you have credit card debt is that you always purchase items with your credit card. If you use cash instead, you won’t incur any debt.
Shopping with cash won’t only teach you how to avoid getting into debt; it will also help you prevent impulse purchases. Impulse buying is often caused by people’s habit of shopping with credit cards because it usually seems like there’s no limit to what can be purchased.
However, if you go shopping with just cash, you won’t be able to spend your money randomly because your spending power is minimal.
6. Don’t Have Multiple Credit Cards
Having multiple credit cards is a ridiculous lifestyle. Multiple credit cards mean multiple payments, and multiple payments (using credit cards) mean that a lot of accumulated debt has to be paid.
If you earn below $12,000 monthly, you shouldn’t have multiple cards because you don’t have a ton of money to waste. It would be best to guide your spending habit, so you don’t live above your means and run into debt eventually.
Moreover, another thing you must know concerning using multiple credit cards is that you may lose track of your expenses, and that’s not a good thing for someone who wants to know how to avoid debt. Once you lose track of your spending, you are creating room for financial instability.
7. Keep Track Of Your Expenses
If you are spending money without knowing where your money goes, you are not doing your finances any good. Expenses are meant to be monitored and tracked. The reason for this is that it helps you to determine if you are spending wisely or not.
For instance, if after monitoring your expenses for the past two months, you discover that your spending has increased by 15%, it means you have to make some adjustments. Otherwise, you may be living above your means, which leads to debt.
If you are a salary earner, you must remember that your paycheck is fixed, and this means you must not let your expenses grow beyond your salary.
8. Use Coupons
You can save cash by collecting coupons. Groceries are a must-have when creating your budget of expenses for the month. But the good thing here is that you can minimize the money spent on groceries by collecting coupons.
Although many people don’t use coupons to save money anymore, you can still leverage coupons to stash away extra money. This extra income can be used for other vital purposes, or you can simply save it in your emergency fund.
9. Stop Racking Up Credit Card Debt
If you wait until your credit card debt piles up, it will be pretty difficult for you to pay it all. It’s a bad money habit that can drastically impact your finances.
As a part of knowing how to avoid debt, you must learn to avoid racking up credit card debt. Pay your credit card debt as you go. Moreover, you can occasionally reduce your debt by using your credit card. It will help if you make purchases with cash most of the time.
10. Increase Your Cash Flow
You can’t know how to avoid debt practically when your income is very low.
Sometimes, people incur debt because they don’t have enough income to cover their expenses. Their low-income status compels them to take loans in order to meet up with their expense. If you happen to be in this situation, the best way to avoid debt is by increasing your cash flow.
Find effective ways to boost your income to have enough money to cover your monthly expenses and even have savings. There are so many ways to increase your cash flow. You can create a side hustle, try out freelancing, or work multiple jobs to generate a high income.
Final Thoughts On How To Avoid Debt
By learning how to avoid debt, you must inculcate several important practices into your lifestyle. Your style of managing and spending money would be different from someone whose goal is not to avoid debt.
To start with, you must learn to constantly budget your monthly income. Don’t spend aimlessly without identifying your expenses. Such a habit is bad for your finances.
More importantly, make sure you are not living above your means. Understand your cash flow and incur only expenses you can comfortably spend money on. If you live above your means, you are positioning yourself for financial difficulty, and that includes debt.
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