Debt is something of a double-edged sword. On the one hand, you will invariably need to take on a certain amount of debt at some time to buy a home, start a business or get an education. The better you manage your debt, the more access to credit you gain. However, if you are not careful, you can quickly dig yourself into a deep hole that becomes more and more difficult to dig your way out of. The term “debt spiral” refers to this process in which any attempts to dig yourself out of debt only seem to land you deeper and deeper in debt. One of the best ways to avoid the debt spiral is to avoid debt before it happens. Here are five ways to avoid debt before it happens.
1. Track your spending and create a budget
Many people believe the first step to managing your finances is to create a budget. Creating a budget won’t do you much good, however, if you don’t have an accurate picture of just how much money you spend on certain things. There are some expenses that remain fairly constant every month and are easy to track, such as rent, car payments or utilities. Other expenses, however, may seem small and insignificant at the moment but can stack up over time. When you start tracking your spending, you might be surprised at just how much you spend on certain things. In order to stick within your budget, you need to set a realistic budget in the first place. Before you can set a realistic budget, you need to have a realistic idea of where all of your money is currently going.
2. Spend less than you make
While there are some exceptions, such as unexpected medical bills or natural disasters, the majority of debt tends to slowly creep up on us rather than overtake us in one fell swoop. Credit cards allow you to spend more than you earn, and that debt can slowly grow out of control. If you spend as little as $50 per week more than you earn, the principle alone adds up to $2,600 per year in debt. Keep in mind, however, that your debt is also quietly racking up interest, so it doesn’t take long for $2,600 to double or even triple when you are only paying the minimum balance each month.
If you can’t live comfortably on what you make in salary, then you either need to find a way to bring in some extra income or make some budget cuts. In some cases, you may even have to make some pretty significant lifestyle changes in order to bring your spending below your income.
3. Manage credit carefully
Opening up a credit card account or establishing a line of credit does not automatically put you in debt, but it can if you don’t manage it carefully. Ironically, establishing and managing your credit well can actually help keep you out of debt. For instance, if you open one or two credit card accounts and pay them off every month before the interest comes due, then you can both establish good credit as well as stay out of debt. Having good credit can help you get a better interest rate on an auto loan, which can lower your monthly car payment. With a lower payment, you can even pay a little more each month to pay your loans off faster.
4. Plan for emergencies
According to a Federal Reserve survey, as many as 46% of adults could not pay a $400 emergency expense out-of-pocket without having to borrow or sell something to do it. While no one can plan for every emergency, it is important to start stashing away some cash reserves for emergencies. Emergency expenses are one of the easiest ways to start plummeting your way down into a debt spiral.
This is also where managing your credit can help. Managing your credit not only gives you access to a low-interest credit line in case of emergencies, but it can also help you get a low-interest rate loan if your emergency needs exceed your available credit.
5. Pay down (or off) any current debt
If you are just now starting to track your finances and set a budget, chances are good you already have debt. Making several different payments to different creditors can eat up a significant amount of your monthly income.
Working with a debt consolidation expert like Brice Capital can help you consolidate all of your debt into one bulk sum so that you can make one payment each month rather than multiple payments. In some cases, a debt consolidation expert like Brice Capital can even help minimize your interest or even reduce the total amount that you owe, allowing you to pay down your debt even faster.