[Important to always read the disclaimer -Ed.]
Being in debt is no joke and can literally consume your whole life if you’re not careful. Literally.
Thanks to compound interest, being in debt is like being trapped inside a snowball rolling down a snow-covered hill; by the time you manage to stop the snowball, it’s ten times bigger than it was when it started. Getting out of debt is like trying to dig yourself out of that expensive snowball with nothing more than a spoon.
If you’ve been in debt before, you’d probably agree that this is a very accurate description. If you haven’t been in debt before, I hope this serves as motivation to do what you can to prevent it.
Have an emergency fund
Life happens when you least expect it. The plumbing goes bad in your home, the car breaks down, or you suddenly find yourself out of a job. Finding the money to cover these types of expenses can be difficult if you’re not already prepared. Those who do not have the means to pay will begin to max out their credit cards, fall behind on bills, which leads to debt. While you can’t predict what will happen from one moment to the next you can try to prepare yourself for circumstances that life throws your way. An emergency savings fund is a savings account that you use for rainy days or emergencies. Like other sites, Investopedia recommends saving at least six months of income.
Create a budget
Budgets don’t have to be restrictive. A basic component of financial management, budgets provide you with a clear outline of where your money is going each month. It ensures that you don’t spend more money than you have, which, by definition, would cause you to go into debt.
These days, creating a monthly budget doesn’t mean you don’t have to sit down with a pen and paper; there are plenty of budgeting apps that you can use to keep track of your income and expenses, like Mint. You can receive alerts when you’re going over budget, when bills are due, and much more
Handle your taxes accurately
One of the biggest line items in your budget will be paying taxes, so you don’t want to mess around when it comes to your taxes each year. Filing late or worse — filing late and finding out that you owe taxes to the IRS — could get you in a lot of trouble. Interest rates and penalty fees could cause you to be in debt for years.
There are many ways to avoid this, but the safest way is to have your taxes prepared by a financial professional such as a tax accountant. Visit a few local CPA firms in your area to see who will provide you with the most efficient tax services. Having someone who is knowledgeable with tax laws and familiar with filing both state and federal taxes is ideal to ensure you’re not missing anything that could cause you to owe the IRS or state later on.
Pay credit card bills on time
Credit cards can quickly cause you to go into debt if you’re not financially mature enough to handle them. While the concept of buying things you want now and paying for them later on sounds like a great idea, paying for it later means paying interest. Credit cards can be a great tool, but it’s important to be responsible with them. Fully review credit card interest rates, and fees to ensure that you understand before accepting an offer. Another way to be responsible with your credit cards is to pay them in a timely fashion. Paying after the due date can incur more interest rates as well as late fees.
Be Mindful of Impulsive Buys
Have you ever purchased an article of clothing and six months later you still have a tag on it? Trust me, I know how tempting it can be to buy something that you really want. You work hard, so why shouldn’t you be able to? This type of thinking however can be dangerous if you’re not careful. Purchasing things without fully considering your financial circumstances can really put you in a bind. There are two ways this can happen; either you spend so much of your money on unnecessary things that you don’t have the money to pay for the important stuff, or you charge your impulse buys to your credit card and can’t afford to pay it off causing late fees and interest to skyrocket.
So how do you stop yourself from making an unnecessary purchase? Here’s a rule of thumb I live by: If I really want it, it will be there tomorrow. “Sleeping on it” is a great way to think things over before making the purchase. It allows you to review your finances, and in most cases you will change your mind.
The funny thing about debt is that while it can be very easy to get into, yet very hard to get out of. While there are instances in which getting into a little bit of debt are unavoidable, it is best to stay out of it as much as possible. By keeping the above tips in mind you are sure to have a much easier time in keeping your finances in order and staying out of debt. However, should you find yourself in debt, having the right attitude and working out a strategy to get out of debt is the most effective solution.