Tips On Staying Out Of Debt

Easy access to credit has been the number one downfall for most consumers resulting in excessive debt and getting in over their heads financially. New credit card offers seem to come everyday and financial institutions continually advertise refinancing offers and low-interest loans. In a consumer driven economy, it is very easy to fall into debt but it can take years and significant resources to get and stay out of debt. Let's take a look and some surefire methods to stay out of debt after becoming debt-free.

Build an Emergency Fund

No small portion of consumers have found themselves in tight financial situations without a monetary safety net. Unexpected medical emergencies or an automobile accident requiring immediate repair means many consumers pull out a credit card or two to make payment. It is highly recommended for all consumers to have a 6 to 8 month emergency cash reserve fund available specifically for these types of unplanned expenses. Keep in mind that an emergency fund is not a piggy bank to be used for questionable purchases or with the intention of paying it back later. A properly funded emergency account is instrumental for staying out of debt.

Eliminate Most Credit Cards

The average consumer has access to between six and eight credit cards carrying an average balance of $8,000. At most, there should be a maximum of three credit cards, two of which are used for daily purchases and the third for emergency situations only. It is important however pick and choose which credit cards you will be canceling and cutting up. Doing this incorrectly can adversely affect your credit score if it eliminates high credit limit or older credit cards. Also, try to refrain from applying for new credit cards as these will appear as hard inquiries on your credit report which can also lower your credit score.

Create a Household Budget

Accumulating excessive debt is sometimes the result of unexpected one-time expenses which are unlikely to happen again. More often than not however it is something that creeps up over time with a purchase here and a purchase there. Many households live beyond their means spending more than they make and a number of years later are sitting on $30,000 of credit card debt. Creating a monthly household budget is crucial to staying out of debt because it provides an overview of what money is coming in and where it is going. Without this knowledge it is next to impossible to curb spending or eliminate wasteful purchases.

Track Your Spending

A household budget will provide a general overview of what money is coming in and what it is being spent on but that is not the same thing as tracking spending habits. Using off-the-shelf software or a physical ledger, track all purchases and categorize them accordingly to know how much is being spent on groceries, gas, entertainment etc. The devil is in the details and when used in combination with a budget, can lead to thousands of dollars in savings per year. This additional money can then be used for an emergency fund or applied to an outstanding mortgage balance.

Modify Your Buying Behavior

None of the solutions for staying out of debt so far have covered behavioral modification. They have primarily focused on tools and techniques to curb spending or monitor purchases. These tips however will only get a consumer so far. Think of modifying behavior as it applies to dieting. Many people who don't relearn how to consume food develop a pattern of yo-yo weight gain and loss. This is not only unhealthy physically but it also damages self-esteem. The same thing applies to debt where consumers need to relearn how to make purchases and wise financial decisions. Without modifying buying behavior it is extremely difficult to stay out of debt over a long period of time.