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Tips for Avoiding Debt

24 May 2017 No Comment

The average American owes $5,700 on a credit card. In isolation, this is not too bad, but when you tack on student loans, it soon becomes a frightening situation. The problem is that debt is growing. Interest rates are at an all-time low, and it has never been easier to borrow money.

The US economy is in recovery, and with a new president in the White House, many US citizens are feeling hopeful about the future. Unemployment has fallen in 10 states and remains stable in 36. Inflation is 2.2% right now, but there are indications it is slowly beginning to creep up, and if that happens, the US Federal Reserve will have no choice but to raise interest rates.

Rising interest rates could spell disaster for households carrying a heavy debt burden. While you may not have a mortgage, you will almost certainly have some degree of credit card debt, so take a look at your finances and decide whether you can afford an increase in monthly outgoings. If the answer is “no,” or you have a mortgage to pay, here are some tips to help you avoid getting into debt.

What is Debt?

Debt is money you owe to creditors. It covers credit cards, bank overdrafts, mortgages, personal loans, car payments and student loans. You may also owe money to friend and family.

The more debt you have, the more perilous your situation is. A small amount of credit card debt is manageable, but paying off a mortgage, student loans, and five credit cards, as well as meeting car payments and a personal loan schedule, could easily tip you over the edge. You may just about cope while you have a steady income, but what would happen if you lost your job or could no longer work due to a serious illness.

As you can see, life soon begins to unravel when your finances are stretched to the limit. The best way to prevent this from happening to you is to avoid getting into debt in the first place.

Mortgage Debt

Some debt cannot be avoided. For example, most people need to take out a mortgage if they want to buy a house. Real estate is an expensive purchase, and unless you have several hundred thousand dollars languishing in a bank account, a mortgage is essential. However, taking out an affordable mortgage is one thing, and overstretching your finances to secure your dream home is quite another.

Be realistic about what you can afford. Your dream home will soon turn into a nightmare if you can barely afford the mortgage payments. In fact, it will all fall around you if you lose your job or the property needs a few expensive repairs. Do you really want that kind of stress keeping you awake at night?

Instead of stretching your finances to the limit, compromise on a cheaper property. Sure, it might not be in such a desirable location, but in time, once you have accumulated some equity in your home, you can trade up for a nice place.

Reputable lenders are unlikely to lend you more than you can realistically afford to pay back, but factor in the likelihood of interest rate rises. Even though borrowing rates are low right now, they are unlikely to stay that way. If you can barely afford to make the mortgage payments now, there is no way you will be able to keep up with the payments if interest rates go up by 5%.

Credit Card Debt

Credit cards are an easy way to spend money. All you have to do is flash the plastic, and the purchase is yours. Credit cards encourage a ‘buy now, pay later’ mentality, which is bad news for anyone with impulse buying tendencies.

To avoid getting into debt, avoid using credit cards wherever possible. Think carefully about whether you need that pair of shoes or a vacation in Cancun. If you can live without either of them, resist the urge to hand over your credit card.

Learn to pay with cash. Handing over cash is more likely to make you question the purchase. It also means you can’t spend what you don’t have. If you must have a credit card for emergencies, keep your debt burden low by sticking to one card.

There are some instances when paying with a credit card is sensible because of consumer protection laws, but unless you need a new washing machine, pay with cash.

Build Up a Savings Nest Egg

Life has a habit of throwing the occasional curve ball, so it pays to be prepared. There will always be times when an unexpected bill drops on the mat, or your car breaks down. Unless you have a savings account, out of the ordinary payments could scupper your personal finances.

It is sensible to have some savings – ideally a minimum of three months’ worth of income. Get into the habit of saving 10% of your salary each month. Channel it directly into a savings account on the day you get paid, or even better, ask your employer to do this for you. You can’t miss what you don’t have.

Cheap Borrowing

Sometimes, borrowing is unavoidable, but how you borrow largely dictates your level of debt. Some types of borrowing are cheaper than others are. For example, if you need to take out a loan, visit a Family First Federal Credit Union rather than a Pay Day loan company, or ask family and friends to help you out until you can get back on your feet again.

Debt is no laughing matter, so if you do end up struggling to make loan repayments or your creditors are making threatening noises, talk to a debt counselor.

There is plenty of help available for families struggling with debt, so ask for help if you are in trouble. A debt manager can talk to your creditors and negotiate cheaper repayments or freeze interest on the debt. What you shouldn’t do is ignore your debt problems.

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