Avoiding getting into debt is a key financial practice that everyone tries to include in their lives. No one wants to be in debt but sometimes it can be hard to stay out of debt and stay afloat. For some people, it may simply be needing to borrow $500 every month to keep their finances in order, while for others, there may be bigger problems to think about and address.
Getting into debt can be a vicious cycle that quickly becomes hard to get out of. It may be that a sudden loss of your job means that you are short of cash and need to borrow money online instantly to avoid debt or get out of immediate financial problems or perhaps some additional bills and expenses that need fast payment stretch your finances too far. No matter why you find yourself in debt, it is important to know and understand how to get out of debt.
There are a number of solutions that people may consider, from short term loans in the immediate term, to debt management in the medium to longer term.
Here we share our top tips to help you stay out of debt before it’s too late.
Why Is It Important to Stay Out Of Debt?
Staying out of debt will help you maintain a good credit rating and stop you from draining your cash funds. When you are in debt, you are constantly worried about repaying money and are also subject to interest fees, late payment charges and negative effects on your credit rating, which will make it harder for you to borrow money in any form in the future.
Once you are debt free, not only will you be less worried, you will also be able to spend your money freely, safe in the knowledge that you do not have to make any more interest payments.
Less debt will mean a better credit rating and make it easier for you to be approved for mortgages, loans or lines of credit.
Budget, Budget, Budget
Budgeting is imperative if you are trying to control your spending, especially in the current economy where prices of everyday items are at an all time high. The best way to manage your spending and stay clear of debt is to make a plan for every dollar that you earn, which will help you realize and understand how much you are earning and how much you are spending on a regular basis..
Budgets can vary in detail and you can modify them depending on your personal and financial situation. However, financial experts generally recommend the 50/30/20 plan. This plan refers to spending 50% of your income on essential items, 30% on non-essential spending and 20% devoted to debt and savings.
However you choose to divide your spending, tracking your expenses and knowing where you might be able to save money is a great habit to get into and can stop you spending more than you earn.
Keep an Emergency Fund
Having an emergency fund is crucial if you are trying to stay out of debt. Financial experts usually recommend having around 3-6 months’ worth of essential expenses.
This could be kept behind for any unanticipated payments, such as home or car repairs or medical bills. It could also act as a buffer in case you find yourself without a regular source of income. Having an emergency fund can also help you avoid needing to borrow money in the form of payday loans online and emergency loans which may be more expensive.
This is especially important for those who have less predictable work such as freelance work or seasonal jobs. Having these funds available means that should you have to make an unanticipated payment, you can cover it without the need for a high interest credit card or loan that could worsen your debt.
Pay Off Your Credit Card Bills Every Month In Full
Paying off your credit card bills monthly and in full is one of the best financial habits you can get into to help you avoid debt. Although it can be tempting to spend all of your available credit, this should only be the case if you need to buy a high-cost item and pay the balance over time.
You should not get into the habit of constantly overspending your credit as you must remember that it is borrowed money that you will need to pay back, and with interest. This means that it is best practice to only buy items that you know you will be able to repay on your monthly bill date.
If you are always able to pay back your credit card bill in full, you will never pay interest and can stay out of debt. Financial experts suggest always keeping your credit utilization ratio at 30% or less; this means that you should never spend more than 30% of your available credit.
Make Sure to Save Money
Having a savings account will stand you in good stead for the future and help you prepare for your financial goals such as a retirement fund. You can set up automatic transfers so that every month, a certain amount of your income can go straight into a savings account without you needing to do anything.
The amount you save is up to you and will depend on how much you are earning as well as how much you need to keep behind for your monthly expenditure. However, even contributing a small amount per month into a savings account will help you to stay out of debt in the long run.
Keep Track Of Your Credit Score
Regularly checking your credit score can be a great way to stay out of debt. The higher your credit score, the better your future prospects for things such as mortgages, loans or other lines of credit.
A high credit score shows lenders that you are a reliable borrower and that you can responsibly manage your finances. To keep your credit score strong, get into the habit of paying off existing debts, paying bills on time and reducing the amount of new credit that you are applying for.
Understand What Loan Options Are Out There
Sometimes, some debt may be unavoidable and it may be that there is a month or a few months where all the additional expenses and bills come in at once, putting huge pressure on your finances. If that should happen, you should be aware of the options available to help you. For example, if you need to borrow 1,000 dollars, there are specific loans available to lend specific amounts of money.
Ultimately, understanding the loan options available to you is important as should you fall into debt, you will be better educated to understand what is available to you to help you get out of the debt cycle and debt spiral; helping you avoid getting into debt.