The fact most Americans have some type(s) of debt at this point just goes to show it’s not always a realistic goal to live completely free from debt. For instance, many people have to take on a mortgage and/or auto loan to secure housing and transportation — but these types of loans tend to come with relatively low interest rates and fixed repayment plans over time.
However, when debt carries high interest rates, or is revolving and becomes difficult to manage it can become a serious problem, one capable of wreaking havoc on your financial standing as well as your mental health.
Here are some things to avoid to live as debt-free as possible.
Spending Without a Budget
Even if it feels like you’re fine without a budget, you’re likely missing opportunities to free up funds to put toward your goals. After all, even little instances of overspending here and there add up over time — and you might not even realize you’re engaging in certain spending habits without an itemized budget to bring them to light.
Luckily budgeting doesn’t have to be a drag or a significant drain on your time. There are apps and software programs to automate many aspects of budgeting.
There are also a few different budgeting models worth considering.
The general 50/30/20 rule dictates spending half your monthly income toward essential living expenses, at most 30 percent toward “wants” and at least 20 percent toward financial goals — like eradicating debt and beefing up your savings. An alternative is zero-based budgeting, where you predetermine where every dollar goes. You can also customize your own spending plan based on your life, but you’ll still need to start by tracking where your money is going each month.
Carrying Credit Card Balances
The option to make partial or minimum payments on your credit card balances may seem tempting, especially during months when money is tight. But this approach is actually the most expensive and time-consuming way to work down your credit card debts. Paying the minimum balance rather than taking a more aggressive approach can extend the life of your balances by years and tack on hundreds or thousands of dollars in interest charges.
It’s worth addressing credit card debts sooner rather than later, whether that means you decide to apply for a debt consolidation loan, enter a debt settlement program or tackle repayment on your own terms.
Neglecting Your Emergency Fund
Emergency funds sometimes end up neglected in favor of more pressing money matters. However, when an unexpected expense rears its head, an adequate emergency fund can mean the difference between sinking and swimming. If you’re still at the starting line when it comes to stashing away emergency savings, rest assured you’re not alone — more than a quarter of adults in America (28 percent) do not yet have an emergency fund. Another quarter do not yet have enough in their fund to float three months of living costs.
Experts generally recommend having at least six months’ worth of living expenses ready to go in the case of an emergency — from a costly car repair to an emergency medical co-pay and anything in between.
It’s helpful to think of building an emergency fund as a “slow and steady” endeavor rather than a sprint. Use your budget to identify a regular amount you can afford to tuck away, then set up automatic deposits to a special account. You’ll be amazed how quickly these contributions add up!
While living debt-free may not be possible, living with problem-free debt is.