Planning Ahead to Avoid Debt
Although we often go into debt to buy a car, buy a house or go to college, there are steps that you can take to minimize or avoid debt altogether. Good planning combined with an ability to spend within your means makes it possible to avoid large debt balances that may need to be repaid at a high rate of interest.
Put Money Each Week Into an Emergency Fund
You never know when an emergency may come up that needs your immediate attention. A car that worked perfectly for the last five years may fail to start one morning or your kid may need to get his or her appendix taken out without warning. Even if you have insurance, you could still be on the hook for a large bill. However, by putting money into a savings account, you can pay that bill without the need to use your credit card or apply for other financing.
Know Needs Versus Wants
You need a roof over your head and four walls to keep the cold, wind and rain out. However, you don’t need a 4,000 square foot mansion with a large pool and a finished basement. Spending money only on what you need can help you spend less overall, which means you have more to put in your savings or retirement account. When you have a sufficient nest egg and emergency fund, you can then think about spending money on a creature comfort that you want.
Take Advantage of Compounding
Putting money in the stock market can be the best thing that you do for your financial future. This is because you can take advantage of compounding to let your money grow exponentially doing nothing other than being patient. Historically, the stock market has grown 7 percent each year, and your financial adviser may be able to offer other savings options that can help your money grow over a variety of time periods. You should also know that stock and other investment income generally gets preferential tax treatment, which can help you retain more of your earnings.
Understand Your Financial Reality
You may want to pay for your child’s college education in full or provide money for a down payment on your child’s first home. However, this may not be possible. In some cases, you may only be able to pay for a semester of school or only give a few hundred dollars for your child’s first house.
Understanding your financial reality will keep you from overextending yourself to satisfy your emotional needs instead of making the rational decision. You should also refrain from cosigning on a student loan or any other loan for a child or anyone else if you think that it would compromise your ability to retire or otherwise hinder you financially.
The last thing that you want to do is take out a home equity loan or apply for a credit card to pay someone else’s debt. While you may feel like you have failed if you couldn’t live up to such a lofty goal, it is not your responsibility to pay for a child’s higher education or support anyone financially once he or she is an adult.
Buy High Quality Goods That Will Last
If you are going to make a big ticket purchase such as buying a new car or remodeling your bathroom, make sure that you buy products that last for a long time. It is always cheaper in the long run to spend a little more upfront on an item that will last for 10, 20 or 50 years compared to spending less money today on something that will need to be replaced every five years. High quality items may also have a higher resale value, which could help you spend less when it is time to upgrade.
It may seem like you almost have to go into debt to live the lifestyle that you want these days. However, with some discipline and good planning, you can live a comfortable life without going into too much debt. Limiting or eliminating debt gives you the freedom to live your life the way you see fit and may allow you to retire much sooner than you imagined.