A lot of people get trapped in the debt spiral and have a very hard time getting out. Fortunately, there are many guides out there with tips, suggestions, and strategies to help you get out. With a bit of hard work, planning, and austerity, you should be able to get yourself debt-free in no time.
What they don’t tell you is that the struggle doesn’t end there.
The problem is that a lot of people just accept the fact that they’re in debt and acknowledge that it’s a problem, but they don’t really try to get to the bottom of how this actually happened. Even if they did diagnose the root cause, it’s not like they didn’t know that the payday loan they’re taking was a bad idea – they just had no choice.
With that in mind, how do you insulate yourself from such emergencies in the future? When you finally become debt-free, how do you stay free of debt? Here are four tips you could use!
Adopt a debt-free lifestyle
The most obvious way to stay out of debt is to swear to lead a debt-free life. This is the simplest, the most obvious but not the easiest thing to do. It’s simple because it’s clear what you have to do. Avoid all debt at all costs. When you don’t have enough money, you tighten a belt. You never use your credit card unless your life depends on it (and even then, you give it a serious thought).
This doesn’t always have to be as austere since you can also consider spending more mindfully.
You’ll have to make some sacrifices like waiting with some purchases for later and even missing some opportunities (and great deals). Still, if your main objective is to stay debt-free, this is how you can do it.
Sure, a debt-free lifestyle will be a lot easier if you increase your income. Find a side-gig or get another job. This way, the extra income will make up for the credit you would have otherwise taken.
Embracing minimalism is another great idea. The problem is that this is not for everyone. A lot of people see lifestyle maintenance as the main reason why they need to try that hard, which means that austerity might end up killing their motivation for work. The latter can be made up for by embracing an important, meaningful life goal. For instance, you may decide to save for your marriage or work/save to own your own house.
Either way, this is not easy and there’s a reason why more people aren’t embracing it. Still, it’s definitely worth it.
Pick the right credit card
Sure, living a completely debt-free lifestyle would be the most efficient option, but it’s not the easiest thing to achieve. You see, the validity of the plan is determined by your ability to stick to it in the long run. It’s the same thing with dieting; the best diet is not the one that makes you lose the most calories in a day – it’s the one that you can abide by for the longest period of time.
Therefore, while swearing off all your credit cards is an option, it might be more practical just to learn how to choose and manage your credit cards better.
The first thing you need to understand is the importance of avoiding credit card debt. To do so, all you need is to pay off the balance in full each month. This way, you’ll avoid high interest charges. This regimen is not easy to stick to, but it will help you use credit responsibly and only for necessary expenses. It’s a simpler (but not as efficient) alternative to having an emergency fund (which we’ll discuss in the next segment).
As for the picking a good credit card, the simplest way is to just find a list of top credit cards, from a reliable portal. Here, all the relevant factors have been examined, analyzed and compared to one another.
Still, if you insist on doing the research manually, you should understand your credit score, compare interest rates, and learn more about different credit card types (travel cards, secured cards, balance transfer cards, etc.).
Start an emergency fund
The main reason why people resort to loans in the first place is that they don’t have an emergency fund when they experience something unforeseen. You see, a lot of people, even those who try to stay out of debt, are living paycheck to paycheck.
This financial policy sounds sensible until you face a massive expense that you have no idea how you’ll cover. You could lose your job for a few months and have to live off something. You might have a medical emergency that you just can’t cover. A dead appliance, car breakdown, damage to your home, etc., are just some of the emergencies that you may face.
The rule of thumb is that your emergency fund should be at least enough to sustain you for three months without any income. Ideally, this figure would be closer to nine months of your expenses.
This is not the only thing that the emergency fund is good for. Sometimes, if your emergency fund is a bit deeper (nine months instead of three months worth), you could use it to avoid missing out on an opportunity. Earlier, we mentioned a chance to buy an item that you want at a discount. Well, you could use your emergency fund for that.
By having an emergency fund, you’ll find yourself in a situation where an expense won’t compel you to get a new loan. You’ll still have a chance to do so but your hand won’t be forced.
Build a good credit score
The reason that you’re in a debt spiral is not that you had to get a loan – it’s because your loan terms were horrible, and your income is not good enough to handle this extra expense. Now, the income is a different story altogether, but your loan terms usually depend on your credit score.
So, in preparation for your next loan and to avoid a scenario where this next loan is as favorable as possible, you need to build a good credit score.
First of all, if you already have some credit cards, the last thing you want to do is close or cancel them. The duration of your credit history is one of the factors that determines your credit score; the longer it is, the better.
The most important two factors are the amount owed and the number of loan types that you currently have. On your way to get rid of debt (and especially through consolidation), you’ve probably solved most of that.
Ultimately, the most important thing to focus on is your vigilance when it comes to paydays and deadlines. By automating your repayments (for everything, including your subscriptions and utilities), you’ll automatically get a credit score boost every month.
Living a debt-free life is a matter of choice
Is it difficult to achieve in a modern world? Absolutely! However, it will bring you greater financial stability and independence, as well as a greater peace of mind. Sure, it requires quite a bit of sacrifice, lifestyle alteration, and discipline but with the right plan (and perspective) it can be done easier than you think.