When too much debt puts a pinch on your financial resources, living debt free sounds like a challenge. With time and effort, you can, however, learn the money management skills you need to turn your financial situation around. Set a time line to pay off outstanding debts and stick to the plan to achieve your goal of debt freedom. Maintain this by following a detailed budget so that you always know how much you bring in and what you can comfortably afford.
Good versus Bad Debt
Know the difference between good debt and bad debt. Good debt helps you invest in your future. Credit card spending on discretionary consumer items that you can't afford generally counts as bad debt. To determine whether a consumer item is discretionary or essential, ask yourself whether you need or want the item before you decide to buy it. Plan and save for discretionary purchases and pay for them in cash instead of using credit cards.
Rainy Day Fund
Set up a rainy day fund. Debts can pile up fast if you or your significant other loses a job, or if someone in your family needs expensive medical treatment. Prepare for the unexpected by setting aside money in a separate bank account that you only withdraw from in case of emergency. Commit to adding a small percentage of your income to your rainy day fund each month if you don't have a lot left for savings. Increase the amount of money you set aside over time.
Credit Scores
Make payments on loans and credit accounts in a timely fashion to maintain a good credit rating. Late payments lower your credit scores and you won't qualify for good interest rates on mortgages, home and car loans and some private student loans. Higher interest rates can mean substantially higher monthly payments on your essential purchases. Check your credit reports each year to make sure that inaccurate information about you isn't lowering your credit scores.
Track All Spending
Track daily spending carefully to see where your money goes. Even small purchases can add up and you need a complete picture of your spending habits to manage them. Financial statements can tell part of the picture; some banks offer online tools to help you with spending. Fill in information gaps not covered on statements by saving all receipts for cash purchases and adding them to your expenses spreadsheet. Examine spending categories regularly to prevent overspending.
Get Professional Advice
Plan ahead for major expenses such as your house, car and college tuition. Avoid peer pressure or sales tactics to convince you to take on a monthly payment that you can't afford. Seek professional advice periodically from a qualified and reputable financial planner when you need it. A good financial planner can provide you with information about tax laws and other considerations pertaining to major financial purchases that can help you limit debt over the long term.
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