December 23rd, 2013
How to Avoid Debt Before You Get Into It
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**Today’s guest post is contributed by Lauren.**
Debt is an ugly four-letter word that gets thrown around all too often. With 68% of Americans in at least some type of debt (credit cards, student loans, medical debt, auto loans, etc.), it can often seem like avoiding any debt at all is impossible. But for those who have gotten out of debt for good, are still young enough to be debt free, or who have been able to avoid debt throughout their adult lives, here are some proven methodologies to avoid future debt instead of getting in over your head.
Live Within Your Means
It seems simple, but living within your means is the easiest tenet of debt-free living to forget. Many people find they are susceptible to “lifestyle creep,” which is what happens as you get older, work harder, and grow your family. Your monthly spending keeps growing and growing because you “need” more and more stuff. But the reality is, a lot of unnecessary things can creep into your budget. It is important to remember to practice thankfulness and to truly try and live within your means. If you master this concept, staying debt free will be no problem for you.
Establish a Savings Account
People often fall prey to debt by being unprepared when the unexpected happens. The easiest way to combat this is to start a savings account as soon as possible. It is never too late to start saving, and every little bit counts.
The best way to establish a savings cushion is to set a budget, find out how much you can set aside from your earnings each month, and then deposit that decided amount into your savings account before you spend anything each month. Whether it is $10 or $100, just save something. Make this easier on yourself by automating payments from your checking account into your savings. If you get a raise or receive a windfall, try saving at least 50% of it. Before you know it, you will have a nice emergency cushion. The emergency cushion should defray any unexpected costs without derailing your budget.
Learn to Use Credit the Healthy Way
Credit and debt often go hand in hand, but unfortunately you need good credit to be able to purchase necessary items like transportation and housing. Credit doesn’t have to be bad if you learn how to use it in a healthy way.
If possible, your goals should be to always pay off the balance every month and to never pay late. Credit can be a great way to access bigger ticket items, but only if you have a solid repayment plan in place. If you have a credit card, see if you can lower the interest rate in case you ever have to carry a balance in the future. In addition, create an online account so you can easily pay your cards online.
Want to be truly prepared in the event of the unexpected? Buy insurance. The most important of these is health insurance, as nearly 1.7 million people will be forced to file for bankruptcy due to high medical debt. Some prefer to take a chance on their youth and vitality rather than pay for health insurance, but what if you were seriously injured or ill for an extended period of time? Many do not come back from medical debt.
It’s the same with other types of insurance: having car insurance can keep you from having to pay out of pocket in the event of a wreck, and rental or homeowners insurance can protect your belongings in the event of theft, fire, or flood. Insurance can seem like a drag because it is a monthly line item expense, and when things are already tight, it can often be the first to go. But if you ever end up needing insurance, you’ll be glad you are covered.
With the right preparation (including the tips above) and a little luck, here’s hoping you can avoid falling victim to debt — both now and in the future!
Lauren Bowling is a personal finance writer at ReadyForZero, a website that helps people get out of debt faster on their own. She enjoys writing about all things finance, relationships, and self-esteem.
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