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Have you piled up a lot of debts?
Well, you aren’t alone! According to the Federal Reserve Bank of New York, U.S. households carried credit card balances that totaled $815 billion in debt in the first quarter of 2018.
But why is debt bad for you?
- You are swiping your credit card or signing legal documents to take out a loan without any hassle. But these conveniences don’t come for free. You need to pay a hefty price for that, which comes in the form of “interest”.
- Let’s think in the other way. While taking out a loan or paying bills by credit card, you are actually paying from your future income. Because, you need to pay back these debts within a specific time, that too with interest.
- It is very tough to stop worrying about your debts. And stress from debt can lead to severe health issues like ulcers, migraines, depression, and even heart attacks!
So, as you can see, having debts makes your life miserable. But is it possible to avoid debts in life?
Here you will find 6 effective ways to stay away from debts as much as possible!
6 effective ways to stay out of debt
1.Craft a budget
“You can’t manage what you don’t measure.”
This aphorism applies to your financial life as well! And there lies the importance of a realistic budget for having a stable financial life. And leading a stable financial life means you are less likely dependent on taking out loans.
So, your baby step to avoid debts would be planning a budget and strictly following it. But make sure to plan a budget which you can follow in your real life!
Sit down with a pen and a piece of paper. If you are a tech-savvy person, you can use a spreadsheet too!
List down all your monthly expenses along with your income from all sources. Then chalk out a budget to declutter all your unnecessary expenses and save as much as possible.
No matter what, always stick to your budget! It will help you to monitor your expenses and stop overspending. Overall, you will develop a habit of saving dollars to lead a frugal life ahead!
2. Switch to autopay
Apply the concept of “pay yourself first” to your life! Gone are those days when you used to save whatever is left at the end of the month.
As soon as you receive your paycheck, allot a part of it for your savings. Set up an automatic payment from your checking account to a savings account. As a result, there won’t be any scope to forget about keeping aside dollars for your savings.
It’s quite normal to get confused with the different due dates for different bills. Failing to make payments on time leads to a hefty amount of penalty or late charges.
To brace yourself from those charges, switch to autopay! Thereafter, you won’t need to remember different due dates of your bills. Moreover, you can save money which you would have spent on paying the penalties and all.
3. Build a rainy-day fund
A few months back, the downstairs area of my house was flooded with groundwater. Fortunately, it wasn’t a budget disaster for us. But many of my neighbours asked, how could I afford the sudden expenses of such a substantial amount.
I smiled and replied, “Thanks to my emergency fund!”
Yes, creating a rainy-day fund is an integral part of your financial planning. Life is full of uncertainty. Be it a sudden home repair, an emergency room visit or unexpected job loss, you should be well-prepared to face any kind of exigency. Else, you might tend to take out loans if any mishap occurs.
Financial experts often advise saving as much as 3 to 6 months of your living expenses in an emergency fund. But don’t worry! It will take a certain time to build such a substantial amount of funds.
What you can do is, keeping some money aside for your rainy-day fund every month, even if the amount is very small.
This will help you to develop a habit of saving money in your emergency fund. And gradually, you will be able to build a substantial amount for your rainy days.
4. Pay your credit card bills on time
Is a credit card a necessary evil?
Like most of the people in our country, you might be using a credit card too. No doubt, using a credit card provides you benefits like:
- You can earn reward points and cashback
- You can build up your credit score
- You get a grace period to pay off your bills
You have to pay off your outstanding balance within the grace period (usually between 20 and 30 days). If you make payment within the grace period, you won’t have to pay any interest! But what if you don’t make payments on time?
- Making late payments can cost you a higher interest rate. Yes, you heard it right! Creditors are allowed to increase your interest rate if you are 60 days late on your repayment. In many cases, the penalty interest rate is as high as 30%!
- The Annual Percentage Rates (APRs) of credit cards usually varies from about 17.03% to 24.05%. As soon as your payment is due, you have to pay the interest along with a finance charge. Usually, the creditors levy a finance charge from about $15 to $38.
- Not paying bills on time can hurt your credit score too. You might know that 35% of your credit score comprises of payment history, i.e, how consistent you are in paying off your bills. So, when you aren’t paying off your bills on time, it’s gonna hurt your credit score!
So, as you can see, you can reap ample benefits by using a credit card. At the same time, you should always remember to make payments on time! Else you may end up getting debt trapped.
5. Refrain from taking out student loans
After graduating from your college, you might find a job with a modest income. But you might feel that your student debt is breathing down your neck while making those monthly payments!
So, what to do?
- Apply for FAFSA (Free Application for Federal Student Aid). FAFSA offers student loans at fixed interest rates set by the government! The U.S. Department of Education sets the interest rates annually on freshly issued federal direct loans.
- You can make money during your college days by working part-time. You will be able to pay your basic expenses with the salary you will get. Instead of depending fully on the financial aid from your parents, scholarships(if any), you can feel the first taste of financial freedom!
6. Climb down the debt ladder
Let’s say, you are strictly following your budget and trying to save as much as possible. But you already have existing debts! It’s always advisable to pay off your debts asap.
Because you see a large chunk of your paycheck goes to pay off your debts every month. As a result, most probably you are unable to make any savings.
Besides, the APRs make it more cumbersome to pay off your debts. And if you have taken out a fast cash advance like a payday loan, most likely you are riddled with incessantly high APRs.
But what if you get a chance to pay off your debts at reduced APRs!
Yes, you heard it right! You may know the importance of debt consolidation, which can help you to pay off your debts at reduced APRs.
As a result, you can save dollars on the interest payments for your debts. Moreover, you can pay off multiple debts through a single monthly payments. And you can get out of the debt trap with ease!
So, what are you waiting for? Follow these tips and shape your life in such a way, that you don’t become vulnerable to the debt trap!