How To Avoid Debt
Avoiding debt is a good habit to get into to ensure that you remain financially stable. It can be difficult to stay out of debt, but getting into debt can quickly become a nasty cycle which is hard to come back from and is something happening to more people who are falling into debt.
Whether you have a sudden financial hit that means you are short of cash or you are constantly looking to borrow money, it is important to know how you can get your finances back on track.
Staying out of debt helps keep your credit rating healthy and stops you from draining emergency financial resources.There are many ways to avoid debt before it’s too late and get into good habits. Here are some top tips for avoiding debt.
Work with a Budget
If you want to control your spending, creating and following a budget is crucial. Budgeting is the best way to know where your money is going and manage your spending. When you create a budget, you will start to realise how much you are spending on a regular basis and what expenses you might be able to cut back.
Budgets follow various different models and will depend largely both on your personal financial circumstances and your spending habits. The 50/30/20 plan is widely recognised by financial experts for being a good way to budget, and a good way to help you avoid needing short term loans like instant payday loans, bad credit loans and other loan options.
This plan states that 50% of your income should be spent on essential items, 30% on non-essential items and 20% on paying off existing debts or putting towards your savings. The ratio is just a guideline and you can choose to divide your spending in whatever way makes the most sense to you. Budgeting is a great habit to get into and can stop you living beyond your means.
Pay Your Credit Cards In Full
One of the best habits to get into is to pay off your credit card bills in full each month. When you receive a credit limit each month, you should always remember that this is borrowed money that you will eventually need to pay back. Although it can be tempting to overspend, you should try and keep your credit utilisation ratio as low as possible – experts recommend that you do not go over 30% of your credit limit.
Lauren Davies of bOnline comments: “Whether you have a business or personal credit card, or both, always do your utmost to pay them both off. Not doing so can lead you into a spiral of debt that can be hard to get out of..”
This makes it far easier for you to pay it back in full each month. If you constantly overspend your credit, you will accumulate interest over time and can very easily fall into debt.
Have a Rainy Day Fund
Keeping money behind for emergencies is crucial if you are wanting to avoid debt. Financial experts typically recommend keeping around 3-6 months of essential expenses behind for a rainy day. Of course, this is not feasible for everyone but the concept of keeping behind money that could be used in an emergency situation should still be followed.
Emergency funds can be used for any unforeseen circumstances that could arise such as a home repair or an unexpected medical bill. It can also cover you in case you temporarily find yourself without a source of income for whatever reason. For those who work freelance jobs or do seasonal work, having an emergency fund can help them during times of instability.
Understand and Keep Track of Your Credit Score
If you get into the habit of regularly checking your credit score, you will have a far better picture of what your finances look like which can help you stay out of debt. Higher credit scores indicate better financial health and can help your future prospects when it comes to things such as securing credit in the future, as well as securing a loan or mortgage.
The better your credit score, the more reliable you will seem as a borrower as it indicates to lenders that you can manage your debt effectively. Habits such as paying your bills on time, paying your credit card on time and in full each month, and keeping a low credit utilisation rate will all help you to build credit.