Debt isn’t merely numbers — it’s the stuff that habits are made of. Getting out of debt involves a permanent shift in how you manage money. Long term, if you do not resolve the cause of why you became indebted in the first place, you could run the risk of, after clearing everything, been quite close to the same position again. But fear not—this guide will teach you how to not only get out of debt, but stay out of debt in the long term.
Identifying Spending Triggers
Most people don’t suddenly get into debt. It tends to occur because of habits and spending triggers. Knowing the reasons you spend can help you make better choices with your money. Ask yourself:
Do you go shopping when you’re stressed?
Are you getting takeout food because you feel too exhausted to cook?
Are you using credit cards because your income does not cover your expenses?
But once you know what triggers your spending, you can come up with a plan to tame that impulse. If you tend to shop when you’re stressed, for example, try exercising, reading or calling a friend instead. If takeout is your vice, meal-prepping can make a dent in your habit.
Building an Emergency Fund
Another reason people remain in debt is that they don’t have savings at all. When an emergency occurs—a car breaks down, a medical bill emerges—they rely on credit cards. To prevent this from happening, start setting up an emergency fund.
How Much Should You Save?
A reasonable minimum is between $500 and $1,000. That sum is small enough to pay for minor emergencies and keeps you from whipping out your credit card. When you’re out of debt, use 3 to 6 months’ worth of expenses as your target for savings.
How to Fast Track Your Emergency Fund
Establish automatic transfers to a savings account.
Put away your tax refund or work bonuses.
Leverage savings (reduce junk fees, dining out, etc) and invest in savings.
Sell items you no longer use.
Budgeting for the Long Haul
A budget is not about limitation — it’s about financial freedom. There are ways to make a budget that will work for you, so that you can actually live comfortably and stay out of debt.
The 50/30/20 Rule: One of the best budgeting methods
50% for must-haves (rent, utilities, meals)
30% for wants (entertainment, hobbies)
Savings and debts– 20%
If you’re carrying high amounts of debt, make the appropriate adjustments to the percentages to prioritize repayment.
Using Credit Responsibly
You can use credit again, and being debt-free doesn’t mean you will never use credit again. It means using it wisely. Here’s how to keep your financial health while still using credit:
Don’t Keep Balances: Pay Them Off Each Month
With a balance carried between months comes interest charges, which can lead back to debt. Paying your bill in full avoids this.
Avoid Unnecessary Debt
Ask yourself before purchasing: Is this a Need? Am I willing to spend the money without putting it on-credit? If the answer is a no, think again.
Limit Your Credit Utilization
Credit utilization is the percentage of your credit limit that you’re using. Ideally, debt should stay below 30% of your credit card limits, and below 10% is even better from a credit score perspective.
Set Up Autopay for Bills
Late payments can damage your credit score. It ensures that you never miss a payment.
Fostering Wise Money Management Skills
Live Below Your Means
You spend more than your earnings and you go into debt. If you have income of $4,000 a month but expenses of $4,500, you will always be dependent on credit. The secret is to live on less than you make and use the surplus for savings and investments.
Pay For Everyday Items With Cash or Debit
It’s easy to overconsume with a credit card. For day-to-day spending, try using cash or a debit card. You don’t go over because if you set a weekly cash budget and then the cash is gone, you just know you’ve hit your limit.
Plan for Large Purchases
ALSO: Save for big purchases instead of financing. Want a new TV or vacation? Stash money away each month until you can afford to purchase it outright.
Invest in Your Future
Now that you’re debt-free, it’s time to grow your wealth. Consider investing in:
A retirement account (401(k) or IRA)
Stocks, bonds or mutual funds
A side hustle or property investment
Setting Financial Goals
Keep yourself on track by being SMART about your goals:
Measurable – “I want to save $10,000 for a down payment.”
Specific — “I will save $500 each month.”
Achievable — “I will reduce wasteful spending so I have savings.”
Related – “I want to own a home.”
Time-bound – “I will achieve my goal in 20 months.”
Avoiding the Debt Trap
It’s so easy to slide back, even after debt is repaid. Be wary of these common missteps:
Lifestyle Inflation
And because many people upgrade their lifestyle as they earn more — driving more expensive cars, owning bigger homes, taking pricier vacations — income is not always the best measure of social mobility, the authors write. And this can cause financial struggles. Instead, use increases and bonuses to build up savings and investments.
Impulse Spending
If you frequently buy on a whim, test out the 48-hour rule: Wait two days before making any purchase over a certain amount. (506 more words)
Not Tracking Expenses
Tracking expenses will keep you from overspending even if you’re in a good financial position. Instead, use budgeting apps or a simple spreadsheet.
Cosigning Loans
If someone whose loan you cosign for doesn’t pay, that can fall on you. Many people fall into debt by cosigning for a friend or relative who then defaults. So think twice before you agree.
Debt-Repentant, the Freedom of a Debt-Free Life
Envision a life where bills are not a cause of stress. Where your money will be spent on the things you care about instead of past costs. That’s the freedom that breaking the debt cycle affords you.
By altering your spending habits, developing a robust financial plan, and remaining dedicated, you can unlock a life devoid of debt and abundant with financial freedom. The journey can be stressful, but the upsides — less stress, more options, and greater security — are well worth the effort.”
November 1 — Data, up to October 2023 Go ahead.