Getting out of debt is a major undertaking that can take years or even decades. While paying off unsecured debts such as credit cards can be easy for some people, paying off your secured debt is a major undertaking. After working so hard to get out of debts, however, many people find themselves taking on more debt within a matter of months of making what they thought would be their last loan payment.
Staying out of debt can be tricky, but it is possible to do. By taking some of the simple steps outlined below, you can insure that you will never fall back into debt again.
If you haven’t already done so, track your spending. Keeping track of what you spend your money on is one of the best ways to understand where your money goes every month. It’s the best way to determine what stores to avoid in months when you need to save money. It is also good to know where your money is going so that you can stick to a budget.
Of course, in addition to simply knowing where your money is going, it is critical to have a plan for spending and saving it. Developing a budget may take some trial and error, since everyone has a plan that is different from everyone else’s. Some people find it is easier for them to save money at the end of every month instead of as soon as they get paid. Other people find it most useful to put aside money for their bills, then pay for everything else out of a “pot” of cash, rather than divide how they want to spend their cash into a lot of different categories.
A vital part of everyone’s budget, however, should be the creation and maintenance of an emergency fund. By creating a reserve of money that can be drawn on in case of an emergency, a person will be able to avoid using their credit card to cover unexpected expenses. Even if you have never had to deal with an emergency in the past, it is important to be prepared for anything like can throw at you.
Now that you’re out of debt, make saving for your emergency fund a habit. At the very least, make sure you have enough in the fund to cover your insurance deductibles. This will ensure that you do not go into debt after an emergency such as a natural disaster or a car accident. After accumulating this much, put aside enough money to live off of for a year. This will ensure that you do not have to use your credit card in the case that you lose your job.
While you’re saving, try to reduce how often you use a credit card. Although some people who get out of credit card debt swear they will never use a credit card again, other people continue to use one with the intention of paying it off in full every month. Until you have a larger emergency fund, however, just a small miscalculation of how much you have used the card over a month can plunge you back into debt. Try to wait until you have at least two months’ worth of living expenses in your emergency fund before starting to use your credit cards again.