Debt has become so pervasive in our lives that it seems nearly impossible not to have it. And while the debate over whether debt is good or bad (or what types of debt are good or bad) rages on, the one thing that isn't covered enough is how to avoid debt.
In fact, the concept of avoiding debt – or not having debt – almost seems foreign at this point.
I believe it's time to change the conversation. For anyone who has debt, there's no question that the conversation should focus on paying it off and staying out of debt for good. But it's also time to start talking about how to avoid debt altogether. Even with the prevalence of credit card usage and loan products, avoiding debt can (and should) be done.
How Did Debt Get So Out of Control?
It seems as though debt – or at least, debt as we know it – is a somewhat new phenomenon. Besides a home or auto loan, the generations before us didn't worry about drowning in debt. They paid for nearly everything in cash. They bought a car and used it until it died. They stayed in one home for the entirety of their mortgage (achieving actual mortgage payoff by the time they retired).
Ah, the good old days.
Now we buy homes on a 30 year mortgage and five year plan, upgrading with every new home purchased. We buy new cars as soon as our old ones are paid off. And paying in cash has become almost archaic. Even our debit cards are modeled after credit cards, to the point that it's hard to tell which is which in our wallets.
Whereas generations of the past would do without when money was tight, we swipe a card. We use debt as a tool to build our lives, instead of using money as a tool to build prosperity. Although this has allowed us to live in luxury (at least compared to the way the generations before us lived), it's also caused us to deal with massive amounts of stress and anxiety, forced us into staying at jobs we don't love (or even like) for fear of not being able to pay our mounting bills, and it can tear families apart.
While I'm not suggesting that we go back to the way things were done years before, there has to be a happy medium. There has to be a way to avoid debt but still build the lives we want to lead. It may be unrealistic to avoid debt completely in our society, but the more we control it, the better off we all will be.
How Financial Newbies Can Avoid Debt
For those just starting to build their finances, a credit card is an obvious first choice. To not build credit is a dangerous game – making it difficult to obtain loans for things you'll need later such as a car or a home. So as much as I want to say that credit cards should be avoided at all costs, the financial newbie does have to build credit of some sort.
But credit cards don't have to equal debt. In fact, a credit card only turns to debt if the balance spent is not paid off in full every month. The problem is, it takes a lot of diligence and self-discipline to do this. Credit cards are just too easy to swipe. And without daily monitoring of the balance, it's guaranteed to grow way beyond what we think we're spending.
If a financial newbie is seeking to build credit, they must pay their credit card balances off every month. There's simply no other way to guarantee that credit card usage won't turn into debt. Here's how it can be done:
Monitor your credit card like you would your checking account.The reason credit cards are so easy to swipe is because they feel limitless. When spending cash, you can clearly see how much you have left when you look into your wallet. And even using a debit card, many of us will typically have that moment before the swipe: I do have enough to cover this, right?….
The best way to use a credit card the way you would your actual money is to monitor the balance daily. Don't let the balance become out of sight, out of mind. If you want to avoid traditional credit cards altogether, you could try using a secured card instead. If you do go that route, be wary of fees – make sure to read reviews on the card you choose before you put any money into it.
Maintain a budget. If you're going to monitor your credit card usage daily, it certainly helps to know what you're looking for. That's where the budget comes in. Don't like the word budget? Try spending plan. Either way, know how much money you've allotted to certain things each month and keep a running tally.
For the first time budget builder, write down a list in two columns: income and expenses. Expenses should include monthly bills such as rent/mortgage, insurance, transportation, food etc. It's also important give yourself room for entertainment and dining, as well as incidental expenses. If you don't leave yourself room for thoseoops, I forgot I pack a lunch today or an unexpected dentist appointment, you'll be guaranteed to go over your budget.
The secret to budgeting is to give yourself flexibility and to forgive yourself if and when you go over budget. It's bound to happen at some point but letting it derail your plan entirely is far more dangerous.
Use financial apps to help you. Once you know how much you can spend daily/monthly on each expense, you'll probably want to automate your tracking. Use tools like Mint to plot out your expenditures as soon as they happen. Then use the large purchase alert from ReadyForZero to help you monitor the security of your card.
These things will help you stay on budget without the headache of a spreadsheet and to monitor the security of your accounts. The more acquainted you are with your daily spending, the quicker you can spot fraudulent purchases. And the sooner you spot fraudulent purchases, the more likely they won't escalate into a major problem.
The next step for avoiding over-usage of debt is to avoid using debt to acquire new debt. Debt can be addicting, especially when used as a tool. Here's how you can make sure you don't become addicted to debt:
Car/home paid off? Keep it. If you've used debt to make a large purchase, such as a car or home, don't fall into the trap of upgrading as soon as you're paid off. Instead, enjoy your newfound “raise” in your budget when you don't have any more payments to make. Doing so will keep you out of debt and allow you to start saving some serious money.
Avoid lifestyle inflation. The hardest part of not buying a new car as soon as yours is paid off and purchasing a new home when you reach a new stage of life is lifestyle inflation. We live in a society that has us upgrading our phones every two years, buying a new home every five years, and purchasing a new car at the first sign of age on our current cars.
Don't buy into the notion that you need to upgrade. More often than not, you don't. Although I would love to have an iPhone 5, my older model is functioning perfectly. And honestly, when I bought my current iPhone a year ago, I almost felt like it was too much, yet now I can't help but feel tempted by the newer version. As much as I'd like to upgrade though, I can take pride in the fact that I'm saving my budget and not being wasteful by getting rid of a perfectly great phone.
The most dangerous thing about lifestyle inflation is the way it sneaks up on us. I didn't even know I wanted an iPhone 5 until my husband bought one. And a homeowner might not have cared at all about granite countertops until shows like House Hunters make them look like a bare necessity. Just like paying off a credit card balance every month, being aware of the tug of lifestyle inflation takes a great deal of self-discipline.
Be cognizant of every purchase you're making and why. Think two or three times about whether the purchase makes sense. Sleep on every purchase for a day or three. And, most of all, keep to your budget.
How to End the Cycle of Debt
For the debt veteran or the current debt avenger, ending the cycle of debt is just as important as paying the debt off. No matter how long and arduous a debt payoff journey is, it's still shockingly easy to get back into debt after it's finished. During and after your debt payoff journey, follow the steps outlined above to make sure you can get out of debt faster and stay out of debt for good. Once you do that, it's time to start thinking about growing your money.
Finally, the best way to avoid debt is to build wealth. If you become very proficient at building wealth, you could even find yourself paying cash for the largest purchases like cards and homes. So how can you build wealth?
Maintain an emergency fund. Financial stability isn't as stable as it sounds. Economies crash, seemingly solid career paths derail, illnesses can strike. It's imperative to be prepared for anything. Work towards building an emergency fund that will keep you going for at least six months if you were to lose your job so you can bounce back if disaster strikes.
Build your retirement fund. Even if you think you'll never retire, save for retirement each month. Ideally this will happen through an employer sponsored 401(k) (and match). If that's not available to you, open an IRA or Roth IRA so you can save for retirement with a tax benefit on your own.
Invest the rest. Finally, you're going to want to grow your money. Whatever you have left each month, invest it. You can start slow while you get to know investing using websites such as Betterment or you can seek out help from a financial advisor. Don't force yourself to learn it all overnight. Take your time and work within your comfort zone. You can always increase your investments when you feel more comfortable.
Debt may have firmly placed its hold on our society, but that doesn't mean you have to fall victim to it. Mindfulness and diligence can help you maintain control over any credit products you use. And remember, it's never too or early or too late to start building your financial future!
This post was published by Shannon, Community and Customer Support Manager for ReadyForZero. ReadyForZero is a company that helps people get out of debt on their own with a simple and free online tool that can automate and track your debt paydown.