How Can I Avoid Falling Into Debt?
| Posted in Bank Blogs
Discover practical tips to stay on track financially and avoid accumulating high-interest debt.
Do one thing: If you don’t have one already, set up a separate checking or savings account and designate it as your emergency fund. Move money into the account every time you get paid.
Avoid Overspending With These Strategies
Sometimes, when the going gets tough, even the toughest among us go shopping. Why is that? Buying something we want can trigger the feel-good endorphins in our brains that give us a boost, at least in the short term. But treat yourself one too many times, and you can end up living above your means, which can potentially lead to living with high-interest credit card debt.
Carrying Debt Month to Month?
Unfortunately, research shows that about half of Americans with credit cards carry debt from month to month, likely because they can’t afford to pay off their accounts in full at the end of each billing cycle. If this sounds like you, or someone you know, take heart.
There is Hope. The good news is, there are strategies you can use to avoid the pitfalls of such debt, specifically high-interest debt from credit cards, so you can ultimately save some money (by avoiding interest charges) and steer clear of the mental stress that can come from living under a mountain of bills.
SavvyMoney Tip: Many of these same strategies can also help you dig yourself out of debt if you are in that situation.
Consider these practical tips from financial experts to help you avoid falling into high-interest debt.
1. Only Use Cash
One way to keep from overspending is by using cash instead of debit or credit cards to make purchases, says Samantha Mockford, CFP, an associate wealth advisor with Citrine Capital in San Francisco. While this may not work for all of your monthly bills, you can certainly use this method for weekly incidentals and even groceries.
Here’s how to do it:
- After you get paid, pull a certain amount of cash from your checking account to cover your expenses.
- Only use cash for all your expenses.
- When the money’s gone, it’s time to stop spending.
2. Create a Spending Plan (or Budget)
One key to achieving your financial goals is to know where your money is going every month. That’s why Mockford also works with clients to develop spending plans based on their goals and values. Those spending plans, or budgets, should include the following:
- Your monthly bills
- Regular expenses
- Long-term savings
- Irregular-but-expected expenses (such as replacing electronics, car repairs, and travel).
“If you choose to take on (more) debt,” she says, “confirm through your budget that you can make space for this new monthly bill.”
3. Build an Emergency Fund
Eric Roberge, CFP and founder of Beyond Your Hammock, stresses to clients the importance of having an emergency fund – or rainy day account – to fall back on when life happens. “Keep an emergency fund of at least three to six months’ worth of expenses and keep this cash somewhere other than where you have your main checking and savings accounts.”
Separate Account
The reason for a separate account is this: “Out of sight, out of mind,” Roberge says. “Keeping your money for emergencies in a different account that you’re not constantly looking at anytime you log into your main online banking portal can help you keep that fund intact and available when you need it for an unpredictable emergency that you might otherwise have to take on some debt to handle.”
4. Learn to Live Below Your Means
I have been sharing this advice for years as a way to help people get out of debt and stay out, for good. Live below your means is Money Rule No. 10 in my book “Money Rules: The Simple Path To Lifelong Security.” If you’re not sure exactly what that looks like, here are some examples of living below your means as a way to save and invest more for your financial future:
- Buy a smaller home or rent a smaller apartment than you can afford.
- Purchase used vehicles instead of new ones.
- Never pay full price if you can help it: Shop sales on everything from meat to sofas and shoes.
- Save your raises by moving the amount of a pay increase into your 401(k) or IRA.
- Get a library card so you can check out books and stream movies for free (or really cheap).
5. In a Word: Unsubscribe
One of the best ways to avoid temptation is to kick it out of your email inbox forever. We know it can be hard to resist those clever subject lines sprinkled with cute emojis waiting for you every morning. So if you signed up for email alerts from some of your favorite retailers, hotels, or wine-of-the-month clubs, it’s officially time to:
- Scroll down to the tiny type near the bottom of those tempting emails.
- Click the unsubscribe link.
- Don’t resubscribe later.
After all, you can’t buy what you can’t see and don’t know about. You can thank us later.
Author: Jean Chatzky With reporting by Casandra Andrews