According to Consumer Financial Protection Bureau (CFPB), credit cards are the largest consumer lending product with over 175 million consumers having at least one credit card. The CFPB also reports that credit cards are one of the largest sources of consumer debt, at nearly a trillion dollars outstanding.
Falling into debt can be a major roadblock to achieving your financial milestones, like buying a home, saving for college or looking forward to retirement. While it can be easy to overspend, there are habits you can start building that will help you avoid living beyond your means and accumulating debt. Here are four steps you can take to start living debt-free and achieve your financial goals.
1) Develop a Budget and Track Your Expenses
Budgeting is the key to financial control. A well thought out budget creates a foundation you can rely on. Creating a budget doesn’t have to be overly complicated, and can help you control your spending, track your expenses, save more money and stay accountable. It provides a roadmap on how to spend your hard earned money and can help you make better financial decisions, prepare for emergencies, get out of debt and stay focused on your long-term financial goals.
- First, begin with income, and be conservative when it comes to bonuses or overtime. Track your income on a notepad, spreadsheet or find a free online app to help you.
- Next, list all of your expenses for the month including housing, phone, food, internet and other expenses. For annual expenses like car insurance premiums, memberships or subscriptions, simply divide by 12 to ensure they are accounted for. Since expenses change from month to month, you’ll need to be sure you adjust your budget before each month begins.
- Finally, subtract all your planned expenses from your monthly income.
The goal here is that you are spending less than you are making. You will want a cushion of a few hundred dollars for your checking account to avoid overdraft fees in the event you underestimated your expenses. Simply having a budget keeps you living within the means of your paycheck. Don’t have enough for a special purchase? Try saving up for it and plan on buying it later. Look at your budget and assess where you can cut back or reallocate funds, but remember to stay within your budget. A successful budget is reviewed frequently and adjusted as time goes on. There are a few popular budgeting methods you can use, such as the Zero-Based Budget, 60% Solution Budget, Paycheck Budget and more. Find your budget style by reviewing our blog on Finding the Budget Style that Works for You.
2) Buy Only What You Need
Understanding your needs is a big step in getting your budget in order. For example, your daily needs may include your living expenses such as groceries, gas, car payment, rent or mortgage.
To identify what is not a need, ask yourself these things:
- Do I need this right now?
- Will I be okay if I don't buy this?
- Will I have enough money after I buy this?
Impulse shopping can wreak havoc on your budget. It’s amazing the amount of money you can save by pausing before you make a purchase and asking yourself, do I actually need this? Consider what you are purchasing in advance so you can research the best deals. Eventually, by pausing and thinking twice before purchasing, you will have a better handle on your impulse purchases.
3) Pay Off Credit Card Transactions Immediately
There is one expense most people would love to live without and that’s credit card interest. The best way to do that is to pay off your bill each month so you’re not carrying a balance. If you already owe money, try to pay off that debt as quickly as possible. For more techniques on eliminating debt, read our blog on 3 Straightforward Strategies for Repaying Debt.
Once you become debt-free, stick to a plan to pay your credit card balances in full. You can use credit cards as a cash alternative so you can earn rewards for regular spending as long as you pay off your card in full every month. If you know yourself, and a credit card isn’t something you think you can handle, don’t get one. A way to manage a credit card is to pay off each purchase the same day you make them. This will force you to actually think twice about how much money you have in your budget before you swipe.
4) Build a Savings
Working toward a sizable savings is challenging, but it’s also one of the most important ways to stay out of debt. Think of your savings as a contingency plan for unexpected expenses. This way, when medical bills or car repairs pop up, you won’t panic with how you will pay for it. Saving is also important for long-term expenses you might not even be planning for yet, such as a child’s education or a new home. Your savings will come in handy for more enjoyable purchases as well, such as a vacation or down payment on a car. Experts recommend 3‐6 months of essential living expenses (rent, gas, water, food, etc.). This will provide you a safety cushion should you become unemployed or suffer some other financial setback. Setting aside even a small amount can add up over time and help you better prepare for an unexpected financial event. If you want to start a rainy day fund, review our blog 5 Ways to Grow Your Savings.
The quickest and most effective way to master the art of debt-free living is to avoid getting into more debt. Living beyond your means is something most have experienced, and sometimes it takes a call to action to motivate you to fix it. Work on establishing a budget that allows you to address your essential expenses while also allowing for money left over. Your new budget will help guide you from spending more money than you have, and if you can’t afford it, don’t put it on a credit card. It’s also encouraged to get a little extra help if needed. Visit balancepro.org
to get further assistance with debt repayment, credit report reviews and more.
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