Working one’s way out of major credit card debt is extremely rewarding. Consumers feel that a heavy weight has lifted off their shoulders. Stress levels decrease, and a sense of freedom prevails. Yet, just as people who’ve lost a significant amount of weight will gain it all back unless they change their lifestyles, individuals who’ve gotten out of debt will fall back into the same situation unless they change their mindsets and habits. If you don’t want to get caught in the debt cycle, follow these do’s and don’ts.
- reward yourself
- make sure you use a budget
- track your spending
- keep a log of your spending
- look at your credit card bill
- pay in cash
- dismiss cliché savings tips
- treat savings as money left over
- pay bills when you get around to it
- neglect building up an emergency fund
- make staying debt-free drudgery
If you’ve worked your way out of debt, recognize what an accomplishment you have achieved. But don’t reward yourself with something you buy that “blows” the budget and starts accumulating debt again. Instead, make yourself a nice dinner, take an afternoon nap, find a new park or trail to explore, or check out a (free) festival or event in your area.
Don’t think of it as a way to prevent you from spending. Rather, it’s a spending plan to align you with your goals. Keep it simple. Free budgeting software abounds, but a spreadsheet, or pencil and paper, will work, too.
Keep receipts, and develop a spending journal. Most people are surprised to find how much they spend each day on small items. Writing it down – just as writing down everything you eat when watching your weight – opens your eyes to patterns, and helps you avoid getting back into debt.
Keep receipts and develop a spending journal. Most people are surprised to find how much they spend each day on small items. Writing it down – just as writing down everything you eat when watching your weight – opens your eyes to patterns, and helps you avoid getting back into debt.
Each monthly statement must include how long it will take to pay off the bill, and the total cost if you pay only the minimum amount due. Statements also must include how much you would need to pay each month to pay the bill off in three years, the total cost to the consumer in doing so, and the savings compared to paying only the minimum payment. Realizing that an item may cost twice its purchase price if you don’t pay it off right away is an excellent debt deterrent.
People who do not use debit or credit cards are less likely to make an extra purchase or spend more than they planned. Before going shopping, put the budgeted amount of cash for your trip into your wallet, take your list, and then head to the store.
You’ve likely heard the recommendation to “skip the coffee at the trendy shop and drink the free coffee available at the office instead.” It may sound cliché, but this is just the type of disciplined act that will help you change your mindset to avoid debt.
Savings needs to be a mandatory “bill,” recorded as a fixed expense every month in your budget. Check with your credit union or bank to arrange automatic withdrawal from your checking account to a savings account. Or see if your employer offers automatic deposit to a savings account. Choose a percent to save from every paycheck (10 percent is very good; more is better; less will work).
To avoid the debt cycle, it’s essential to pay every bill in full and on time. You will thereby avoid late charges, penalties, fees and stress – and up your credit score.
Ideally, you’ll want six-nine months’ worth of living expenses in an emergency fund. If that sounds unrealistic, break it down to realistic parts, saving a little at a time. Think about the level of expense that would cause you to rush to a credit card. A $250 car repair bill? A $500 medical bill? Start by having at least that amount available. Then build toward six or more months’ living expenses.
Remember that it’s really about aligning your spending and your goals. Many people even make saving and budgeting a fun “game.” Go beyond using coupons, and think of creative ways you can save and use your money. Maybe you can purchase birthday and holiday gifts throughout the year when the item you are seeking is on sale. Or perhaps you find that you can save – and eat better – by buying locally grown and made food. Consolidate online shopping, send electronic holiday cards, repurpose and reuse things in your own home. Once you start thinking “outside the box,” you will have a better chance at changing your mindset to stay debt-free.
Developing new habits and patterns isn’t easy. But by using some of the discipline you used to pay off debt in the first place, you can change your mindset, spending and financial practices. Living within (or below) your means is worth it.