Debts are something that you should avoid if you intend to build a solid financial foundation, and for you to avoid from falling deep into financial traps. Many people misunderstand the concept of debt. Some think debt is instant money and others even see it as a source of extra income.
Debt creates a life of its own, or in other words, interest. Interest grows in time, and it grows at a compounding rate. That means debt grows bigger and bigger at a faster rate, and if you don’t settle it immediately, you’ll accumulate bigger debt.
Though there are debts that you can consider as good debt, most debts are bad debts and these must be avoided. If you have existing debts, you either must manage it well or better yet, settle it immediately. If you don’t have any existing debt, as much as possible, avoid it. Avoiding debt will spare you from a lot of financial strains and headaches later on. Here are some tips on how to avoid debt.
1. Create a budget. Budgets are very underrated. Many people don’t create budgets because they think that they are limiting themselves and it keeps them from enjoying their hard earned money. Though they know and understand the importance of having a budget, they keep themselves from doing or at least following one because they don’t have the emotional discipline to stick to it. Having a budget simply makes you realize and see the priorities that you have financially. If you have a budget, it will remind you where to spend your money. It will make you a wise spender.
In making a budget, first list all the things that you spend on and second, rank these things in terms of priority. After ranking your priorities, allocate the amount that you need in these priorities. After pinpointing your priorities, stick to your budget and settle everything first.
2. Find additional sources of income. Most of the time, people run into debt because they run short of money. Whether they don’t have or don’t stick to a budget plan or their source of income is not enough to support their needs. In the second point, the solution is to add more income to provide you more spending power and cushion. The mistake that most people make is sticking to a single source of income.
If you have a day job, do some small scale business such as traditional ones or online business. You can also opt to go for networking or multi level marketing. Do whatever it takes to earn more income and increase your cash flow. If you have more income, you can easily pay off your existing debts and you can keep yourself from falling into the debt trap.
3. Live a frugal lifestyle. Most debts result from wants. Wants are things that you really don’t need or these are things that you can still live a good life without. A very common mistake that most people make is spending first on their wants in order to satisfy their urges and focus on their needs later on. Needs are things that you can’t live without hence, if you run short of money and have needs to buy, you’ll definitely end up in debt.
By having a budget, you will be reminded to focus on your priorities which is most of the time, needs. Your needs may include savings, food, clothing, medical support (medications or maintenance), education, and utilities. Settle all of these first before jumping to your wants.
4. Create a hefty amount of emergency fund. An emergency fund serves a single purpose, an amount of money that you can run to in case of emergency. Emergency situations are also one of the most causes of debt. If you don’t have an emergency fund, chances are you’ll most likely end up in debt so you can afford the cost of the emergency. Having an emergency fund will keep you from falling into such trap.
Financial experts suggest saving at least three months of your monthly income. If you’re earning $1,000 a month, then you must have an emergency fund worth at least $3,000. Keep it somewhere very accessible and safe such as banks. Ideally, you should keep an emergency fund worth 10 years of your income. If you are earning $1,000 a month, you should have a fund ready to be used at any moment worth $120,000. It might be huge, but it will spare you from lots of headache and financial trouble when the need arises.