How to Stay Out of Debt
Sharon Zavalanski
President and CEO at Sharon L. Zavalanski, CPA/ Certified Public Accountant
No one wants to go into debt. Unfortunately, keeping those red marks out of your ledger is easier said than done. These tips will help keep you from falling into the depths of fiscal despair.
It’s so easy to fall deeply into the abyss of debt. There are hot new toys to buy for your kids, and fancy new electronics to purchase for you and your spouse.
Then, there are the day-to-day expenses: your rent or mortgage, groceries, insurance premiums, gasoline, cable, and other bills.
But debt is not inevitable. To help you sidestep debt before it starts spiraling out of control, we’ve got these tips.
1. Know Where You Stand
Compute your household’s debt-to-income ratio by dividing total monthly debt payments by gross monthly income. This tells you what share of your income goes to debt payments each month. You want a low score.
Say your gross monthly income is $6,000, and each month you pay:
Your monthly debt payments total $2,000. Divide $2,000 by $6,000, and you’ll discover that one-third of your gross income goes to debt payments.
The higher your debt-to-income ratio, the more likely you are to run into trouble making monthly payments.
2. Don’t Try To Keep Up With The Joneses
The family next door gets a shiny new car every two years, and you just saw a 65-inch LED TV delivered there. Lately, the mom and daughter rave about their weekly mani-pedis.
They might be financially fine — or perhaps they are living beyond their means.
You don’t have to follow in their footsteps. As Money Talks News founder Stacy Johnson has written, you can either?look?rich or?be?rich — you probably won’t live long enough to accomplish both. He explains in “The 10 Golden Rules of Becoming a Millionaire“:
“Diverting your investable cash into things like cars, clothing, vacations and houses you can’t afford will make you look rich now, but prevent you from actually becoming rich later.”
3. ‘Charge It’ Less
When you pay with credit, you’re really borrowing money that has to be paid back. Let’s say you paid $899 for a computer. If you don’t have the money in the bank to pay off that credit card bill by the end of the month, your purchase will end up costing you a lot more.
Charge $899 on a card with a 15% APR and a monthly minimum monthly payment of $20, and it will take you more than five years to pay for that computer.
Here’s the toughest part to swallow: In that time, you will pay more than $400 in interest charges — meaning you have paid more than $1,300 for an $899 device.
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4. Track Your Spending
Track your spending with free software designed for the task. Seeing where your money goes helps you spot unnecessary purchases and adjust your spending.
As we explain in “5 Reasons You’ll Never Get Out of Debt”:
“If you don’t know where your money is going or even how much you make monthly, you’ll never get out of debt. Every time you open your bank account, it will be a crapshoot whether there is money there.”
Keeping close tabs on bank balances also helps you avoid overdraft charges.
Looking for the right software to help you track your spending? Several folks at Money Talks News swear by our partner?You Need a Budget, also known as YNAB.
5. Plan Your Purchases
Save cash upfront for major purchases like that new TV or trip to Disney World.
That doesn’t mean you have to carry thousands in cash around in your wallet. Open a high-yield savings account to put aside funds for any anticipated purchases — not just for big-ticket items but also for big-expense times like Christmas and back-to-school shopping.
To find the right account, stop by our?Solutions Center?and?search for a great rate on a savings account.
If you want to use credit cards to pay for the purchases and capture rewards the cards may offer, go ahead. But only do so if you have saved the money to pay off the splurge before you’re charged interest on the card balance. That will help keep your monthly bills down, your debt-to-income ratio at a reasonable level, and your?credit score up.
6. Adjust Your Spending
Life happens. That’s why you should be prepared with enough savings to pay living expenses for at least six months. Even with an?emergency fund, you’ll probably need to cut back on spending if you get divorced, lose a job, or take unpaid leave to care for your spouse or parents.
Discuss the changing situation with your family to get support for spending adjustments. Even small purchases add up. Can you cut your cellphone plan, curtail your cable bill, or forgo that daily mocha latte?
7. Boost Your Income
Whether it’s a one-time windfall or income from a steady side gig, use extra money to pay down debt or boost savings so you don’t run up more debt.
Technology makes it easier than ever to make money on the side. Whether it’s?starting a dog-sitting service,?selling goods online, or taking a part-time job with work-from-home opportunities, there are hundreds of ways to generate extra cash legitimately.
Resolving tax debt on your own doesn’t have to be overwhelming. Rail33 has a super-easy guide that gives you all you need to file an offer in compromise — and get rid of your tax debts. Let Rail33 help you help yourself with your tax debt. Visit Rail33.com or call 571.445.3387 to get started.