Debt is a serious problem in this country. Staying out of debt is hard for most people, due to lack of knowledge and lack of discipline. Keeping out of debt is much more than creating and following a budget, although a budget is a cornerstone of becoming debt free. A big part of staying debt free and escaping any debt you already may have is to understand your financial strengths and weaknesses. An example of a financial strength may be that you have several stocks that pay out handsome dividends, and that you have another side stream of passive income, such as a website online that earns ad revenue. An example of a weakness may be that you spend way to much money on dining out, and do not save anything towards an emergency fund. Once you know where you slip up, you can make a plan to correct the financial mistakes you’re making.
Some tips to help you:
* Pay for things with cash, this makes it less likely that you will break out plastic to fund a purchase.
* Leave your credit cards at home, save them for emergencies.
* Never spend more than you make.
* Never use credit to pay for everyday items if you have financial problems.
* Remember anything paid for on credit has a true cost which is much higher than the sticker price, you must factor in all the interest you will be paying.
Another key to staying out of debt is to save, save, save. You need to ensure that some sizable portion of your income is going towards savings. There are 3 types of savings you should practice:
Saving For Retirement
One day you will retire, that is a fact, unless you meet an untimely death early in life. You must prepare for retirement, social security alone will not be enough for you to live comfortably on. In order to ensure you have a good retirement, you will need to save, then invest for your retirement. If you employer offers you a 401(k) plan you should opt into it. Even better if you can opt into a ROTH IRA account. If your employer matches contributions to your retirement fund you should take full advantage of that offer, plugging in as much of your income as you can towards your retirement. You can also borrow against your nest egg in the case of an emergency, so your retirement funds can become a safety net in the case of an emergency.
Save For Emergencies
You should always have a rainy day fund set aside. Many times we end up borrowing money during an emergency, paying a hefty cost in interest. Many peoples lives are financially ruined if they lose a job or meet some medical problem that keeps them out of work for an extended period of time. The rule of the thumb is that you should have at minimum 3 months of income set aside, but I recommend setting aside one years worth of income. Yes that can take years to accomplish, but you can make the money work for you by putting it into a savings account where it garners interest. To help make this possible you can always set up automatic savings withdraws to your savings account directly from your paycheck.
Save For Purchases
Anything you buy on credit will cost you dearly in interest, so it is far better to just set aside money each month into a special savings account meant for big purchases. This way you avoid interest charges, and have the money working for you gaining interest while you save for your purchases. It is the same thing, since if you fund your purchases on credit you are already setting aside money each month. The only difference here is that you are waiting to take possession of the item or items in question until you can pay cash for the entire purchase.