Nobody actively chooses to accrue huge amounts of debt. Debt is stressful and it can make your life utterly miserable, particularly if you end up homeless and alone because of your crazy, out-of-control spending habits. Yet millions of people do end up in debt and spend years fighting to claw their way back out of the mire.
There are many reasons why people end up in debt, but it is not always their fault. For example, say you are diagnosed with a critical illness and you do not have any insurance to cover your lost earnings. It won’t be long before you fall behind on the rent or mortgage payments.
Is this just bad luck or could you have done things differently?
The best way to avoid ending up in debt is to be disciplined about your financial planning. Life has a nasty habit of throwing curve balls in our direction, so it pays to be prepared. In the case of the example above, buying a simple insurance policy would not stop you getting ill, but it would prevent such an awful event from threatening your family’s financial security.
Insurance is an important tool. The whole point of insurance is that it is there to catch you, in a metaphorical sense, when you fall. Income protection insurance pays if you lose your job or you can’t work and critical illness pays out if you are diagnosed with a serious illness. Both of these tools will protect you and your family from financial stress and debt.
Once you have some insurance in place to protect you from the unexpected life events we sometimes have to deal with, it is time to start thinking about how you manage your personal finances.
Always have some money set aside to cover unexpected expenses. Cars break down and washing machines die. That’s life. As long as you have some spare cash, these annoyances won’t faze you and you won’t be tempted to take out a short-term loan with sky-high interest rates to pay for a car repair or washing machine.
Live Within Your Means
We live in a spend, spend, spend culture. TV, social media, and the internet shows us daily how the other half live. It isn’t hard to be lulled into thinking everyone and their dog owns a giant flat screen TV and goes to Hawaii for their vacation twice yearly. You would be forgiven for being envious if you live in a tiny one-room apartment and the last time you had a vacation was when Reagan was in the White House. However, irresponsible spending is a fast-track way of getting into debt and it is why most people end up with bills and credit repayments they can’t meet.
Before you start spending money on expensive things, make sure you have the essentials covered. If you can’t make your rent payments, taking out a loan to buy a new car is a seriously bad idea.
Draw up a budget and work out exactly what your income vs. expenditure is. If there is a big difference between the two, look at ways to reduce your expenses – there are bound be things you can save money on or eliminate altogether.
Have a Saving Plan
Instead of spending on credit cards and taking out loans, save up for things you want. Implementing a savings plan requires a lot of self-discipline, but it can be done. Even if you only have $100 spare a month, putting this into a separate pot will net you $1,200 at the end of one year, and in three years, all being well, you would have $3,600 in your pot.
We all need to borrow money from time to time. It isn’t ideal, but sometimes life happens and we need to make a home improvement or buy a new car. The trick is to borrow wisely.
Look at your options and never borrow more than you need. For smaller amounts, check out interest-free credit card deals. As long as you pay off the balance before the free period ends, your ‘loan’ won’t cost you a cent. If you need to borrow a larger amount, try to secure a personal loan at a low interest rate, so the overall cost of borrowing is not too high.
Staying in control of your personal finances is not rocket science. It simply requires self-control and a disciplined attitude to spending. However, if you do end up in debt, don’t bury your head in the sand, as your debts won’t magically disappear if you ignore them.