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Without wasting any time, let’s get to the article and understand how to avoid getting into debt.
11 Strategies To Avoid Debt
1. Spend On Needs, Cut Down Wants
Is the iPhone a Need or a Want? Is the latest washing machine a Need or a Want? Dinner outside twice a week, Need or Want?
There’s always room for cutting expenses and increasing your savings. All you need is a willing mind and some time to devote to budgeting. In the above examples, according to me, an iPhone, the latest washing machine and dinner twice a week are wants and not needs.
We can avoid these expenses if we have money problems, we can save up this money and stay out of debt easily. The more money we have in the bank, the less likely we will be in debt.
Groceries are needs but buying two cans of beer or a food item which is not a necessary, isn’t a need, it’s a want.
Don’t hesitate to spend on needs, you need it to make your life a good life, what you don’t need it wants.
2. Focus On Your Emergency Fund
One of the few most important rules of money management is creating an emergency fund and putting money in it consistently.
Emergency Funds are extremely crucial for those rare circumstances when you need urgent cash and you can’t seem to get it from any other places.
If you lose your job or you have just met with a fatal accident, you need cash to pay, right? Usually, in such times, debt is your best friend but I’m sure you will regret this decision later.
Why not maintain a well-funded emergency fund? You will have money right when you need it, you don’t need to ask anyone for cash. The main purpose of an emergency fund is to handle all your emergency expenses right away.
Filling up your emergency fund with 3 months to 6 months of living expenses should be enough. Try to have 6 months of expenses, if that’s not possible then do 3.
Sage Tip: Add a column in your budgeting worksheet named ‘Emergency Fund’ Do the calculations and every month put some money in this account.
3. Life Is Good With A Budgeting System
Here’s what I want you to do – Grab my free budget template and create your monthly budget. Write down all your income and expenses, your debts, and your wants.
Everything you spent your money on this month, write it down. Then subtract income from all your expenses, what do you get? How much money do you have in the bank?
Most often the numbers you will see are laughable and stupid. The biggest problem with people when they are in debt is they don’t realize how much money they spend.
By documenting your expenses neatly in a template, you have a reference point, if you want to attend an event, you can make space for it in your budget by reducing other expenses.
Let’s say I want to save Rs 10000 for a dinner party (in two weeks) – I have a good look at my budget, see what expenses can I eliminate or reduce for the time being, and make a few tweaks in my budget, now I have Rs 10000 to spend without stressing about money cause I have adjusted it using my budget template.
Be sure to track all your expenses systematically, that also includes all card expenses too.
5 step method to Budgeting Your Money.
Step 1: Figure out Your Income
Don’t start writing your expenses if you don’t know how much you make. Look at your bank statements and get an accurate amount.
If you only have one source of income, you’re jeopardizing your potential to financially succeed. Having a single source of income in 2023 is literally a crime (in my eyes)!
Don’t worry, the FBI aren’t at your doors nor will they come anytime soon. I’ll help you stay away from them only if you will start a side hustle or a part-time job. Whatever suits you, do something that brings home additional income.
Read More >>>
Step 2: Identify your Current Expenses
You need to make a list that includes all expenses you made during that month. Right from the grocery bill to the expensive sound system, a car, rental, new plants and so on.
Write them down systematically, if you have my budgeting template, I’ve separate sheets for separate expenses, that way you can keep them organized.
Also, fill in the amounts and go through this list. Take a pencil, a pen and tick mark your essentials, cross the items that can be avoided and red cross the items that should be avoided.
Step 3: Keep some Wiggle Room
Leave some wiggle room in your budget. If your monthly expenses come up to Rs 10,000, make it 12,000 in your budget. Add a column and name it Wiggle Room. Here you keep some money in case you need it.
Budgeting is supposed to be fun, interesting and a long term journey. If you are too strict with yourself and restrict yourself from spending anything outside your list, sooner or later you are going to stop budgeting.
We don’t want that, right? Maybe you’ve had a hectic day and a cup of hot coffee from Starbucks is exactly what you need. Don’t say NO!
Take the cup of coffee, relish it and get back to work. Obviously, you can’t do this every day. If you need that coffee every day, make a cup of coffee at home, pack it and take it to your office and drink it whenever you feel like it.
Step 4: Distribute Your Savings
Now that you’re done with managing your expenses, it’s time to allocate your savings for optimum growth. We can distribute our savings in 3 parts –
- Emergency Fund
A well-funded emergency fund is non-negotiable. A part of your savings needs to be allocated towards this savings account each month until the required amount is filled up. Again 3 – 6 months of expenses should be your target.
Investing your money is the best way to guarantee your money doesn’t depreciate over time. The first thing you need to do is determine your risk-bearing capacity. If you’re young, you can bear more risk.
That means you can invest aggressively in the market (mostly stock market). Dislike investing in the stock market, that’s fine, there are many other assets that you can invest your money in.
Read More >>> 17 simple ways to invest with little money.
- Bank Account
You can’t put all of your money in investments. They do give you better returns but you need liquidity and money at your disposal at all times, for that you need to keep some money in your savings account. About 5 – 10% of your monthly income should be enough.
Step 5: Revisit and Make Changes
You are ready to challenge your financial future. All you need to do is observe, look for problems and rectify them.
You may have calculated grocery costs to be Rs 8,000 a month but turns out it’s Rs 9,000. So tweak your budget sheet, cut costs someplace else.
4. Don’t Raise Your Expenses When You Get A Raise
Congratulations, you’ve just got a raise from work! A raise from work is great but that doesn’t mean you bump up your expenses. You have worked so hard to stay on budget, avoid overspending and controlling your impulsive buying habits.
People who are in debt are usually in debt because of the urge of spending. They don’t have any control over their expenses. They can’t stop impulsive buying habits and they don’t have money saved because they’ve spent it all.
Any additional money you receive must go towards your savings and investments. An increase in spending will break the habit you created and eventually you will end up spending like you used to previously (when you were financially crippled).
Invest the money, let your money grow for your future. Didn’t get a raise from work? I am sure that after you read my article on The Ultimate Guide To Get A Raise, you will surely get a 5% raise if not 25%!
5. Ditch Credit Cards, Cash Is King
There are several reasons why using a credit card can be super fatal to your existence. But you still choose to use it even if it may cause enormous financial problems in your life.
Most successful people use a credit card but that’s because they can afford to pay it and they don’t do the stupid thing that lands almost 90% of people in debt – Buying things you can’t afford to buy in cash.
Don’t be under the delusion that you can pay off the money so easily, credit cards are made with the two intentions – one is to ease the process of buying and second, is to make money (off its customer a.k.a YOU).
Companies know that 3 out of 10 people will default payments thus bringing in cash for the business. I don’t hate credit cards, they have quite some advantages, the problem lies in our mindset and our ability to fall into traps easily. That’s why I always suggest people stay away from credit cards.
The next time you plan on using a credit card, ask yourself one question – Can you afford to buy this item in cash right now?
If that’s a Yes, you can use that nasty card but if it’s a No (isn’t it always a no), you know what to do.
6. Pay Off Your Credit Card Balance
Credit cards are important because they determine your credit score. A good credit score is essential in the banking world. Yea it helps you determine your credit score but it also means faster problem-solving time for customers with better credit score and additional benefits.
Whenever you consider using a credit card, pay it off as soon as you go home. You don’t want to keep amounts in your credit card pending, if you forget to pay it on the last day or some urgent work keeps you busy, you will simply have to pay additional penalty charges on your balance.
Also, stick to using credit cards only when they have offers, avoid large purchases with credit cards at all costs.
7. Plan Your Purchases Months Before Your Buy
Unplanned expenses are the worst expenses in the history of expenses. They destroy our budget, they are usually expensive and 70% of the time, they are not useful.
Here’s what I want you to do – Anything you feel like buying something new, write it down somewhere and buy it in a few months.
Now make adjustments in your budget to fit this expense without exceeding your monthly expenses. I mean if your monthly expenses are 30% of your income, buy your new thing but don’t exceed spending more than 30% of your income.
This can be achieved by reducing other expenses, that can be your grocery expenses, electricity bills, wifi bill, maybe you negotiate your rentals, your focus should be to do whatever you can with your budget to keep your expenses constant.
I’m telling you, if you follow this strategy, you will be extremely happy because you got what you want and you didn’t spend anything extra.
8. Use Your Savings To Pay Off Existing Debt
I hope you’re not in debt, but if you are, use the money you have saved and pay off any debt that is remaining. The interest rate charged on your debt is probably high compared to the scant interest rate you receive when you lock up your money in a savings account.
Don’t use all of your money to pay off debt, but about 70% of your bank balance should be a good start towards throwing debt out of your life.
99% of the times the interest rate you make is far less than the interest rate the bank charges you to take on the debt. Paying it off will not only make you financially stable but it will also reduce stress and anxiety.
Debt Pay Off Step 1: Choose a Debt paying Strategy
I don’t know all the debt-paying strategies out there, but I am aware of the two best strategies that will 1000% work – Debt Snowball and Debt Avalanche.
Debt Snowball focuses on paying your smallest debts first; this is useful if you face a hard time with payments. Debt Avalanche focuses on paying the debt with the highest interest rate.
Read More >>> Debt Snowball Or Debt Avalanche: What’s Better?
Debt Pay Off Step 2: Any additional money goes straight for debt payments
Did you make extra money this month? Got bonus or cash from friends and family? Don’t waste it but use it to pay off your debts.
All additional income should go towards getting rid of debt. You could spend 10% of the additional amount if you like, but the rest, it has to go towards debt payments.
Debt Pay Off Step 3: Be Consistent & Negotiate With Debt Company
The last tip I have for you is to be consistent. You’ll face obstacles that will force you to put less towards your debt payments, but be firm, have a clear vision and go with it.
Till you get rid of all debts you possess, don’t spend your money on anything else. Stay frugal. Next, you should also try to negotiate your interest rates with the company where you took debt.
If that’s a bank, talk to them, try to see if you can get a lower rate. Even a slight reduction in interest rates can benefit you in a good way.
9. Underestimate Your Income And Overestimate Your Expenses
If you are budgeting, good job as you are way ahead of most people on earth. You are in charge of your finances and I am assuming you want to be financially independent.
But here’s where you might make a mistake, you stick to the numbers way too much. If you were supposed to spend ‘X’ amount on rent, if you spent ‘X + 3’, you’ll be confused and you’ll have to redo your budget.
Your expenses can fluctuate easily so can your income. Your job is to consider these numbers in advance and be ready for them, so you don’t panic when the problem occurs.
It’s difficult to manage all your expenses with little money but if your budget (which I’m hoping you do), you take the driver’s seat and can easily predict where you will be heading.
If you always make ‘Y’ income, consider calculating ‘Y – 2’ as your income and if your expenses are ‘X’, consider it to be ‘X + 3’. That way if you need to purchase something, you can do so freely without stressing too much about your financial goals.
10. The Conservatism Principle
Do you work as an accountant? In accounting, there is a principle called Conservatism Principle, which focuses on preparing for losses in advance or immediately when the problem arises.
Profits and gains are usually recorded only after it has been fully received. Let’s take an example to understand this better – Ressler will get a 5% bonus in the next month, likely he may make certain changes in his budget worksheet, he may increase his expenses by 3% or he may want to invest that 5% in low-risk stocks.
Now conservatism principle says that only once Ressler gets his monthly income + 5% bonus, he can decide what he will do with that additional money, not before he gets it.
If Ressler incurs losses, he needs to have in place an emergency fund or another savings account which he has safely stored for such situations.
11. All That Glitters Is Not Gold
Aram gets a loan at a significantly lower interest rate, something which only one bank is offering at this point. He gets excited to be in debt and happily purchases an expensive car and makes regular debt payments.
He seems happy doing this as he received extremely low-interest rates, he says it’s half of what banks usually charge.
Some banks and financial institutions offer such interest rates but with multiple clauses, these may look good at first, but once you get into the details, it may be equal to or much more than what you would’ve paid for that car under normal interest rates.
Such situations look all beautiful on the outside but are the same on the inside. Your job is to look between the lines, find out all such hidden costs, the time frame for your debt, etc.
Don’t jump into a deal (even if it’s made by a reputable banking company) without properly sitting down and doing the maths.
To Be In Debt Or Not Be In Debt: Final Thoughts
Debt is nasty, we all know that and it can seriously hamper your productivity and stress. You may have a great strategy to get out of debt but there will be obstacles that hinder your path to being debt-free.
Many distinguish debt into good debt and bad debt, saying things like good debt means debt that you use for business purposes and bad debt is for luxury items like cars, houses, etc that are unnecessary.
Debt bad debt can be good debt if you have the funds to pay the cash. So debt finally boils down to whether you will be in a mental and financial capacity to continue the journey of paying the debt.
100% of the people who take up debt believe they can pay it off, that’s why they take it right! In time the majority of them realise they can’t manage the debt, we all know what happens after that.
With a few calculations, some logical thinking and a lot of control over impulsive buying, you can have an amazing life, filled with happiness and laughter and especially a life WITHOUT DEBT.
If you’ve made it till here, I have a question for you – In this article I have named two men that are characters in a famous series, if you find out which series they act in, let me know in the comments! Have fun searching!
Also if you are having problems relating to debt, comment below. I’ll try my best to help you out!
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