Friday, August 4, 2017
How to stay debt-free forever
Debt is funny in my opinion. It’s kind of like the crazy old uncle of your personal finances. Many people think if they ignore it, then it will go away. The sad reality of debt is that it doesn’t go away on its own and it won’t be easy to get rid of. In today’s post, I will wrap up Debt Week by showing you how to never get into debt again or ever, to begin with. As a financial advisor, it is important to understand my client’s complete situation. These days that situation often includes some form of debt. Helping them understand their debt and its effects is an important step to getting them to financial freedom. Showing the importance of staying out of debt makes my job that much easier and their lives that much better. Debt prevention comes from a strong foundation of good planning and discipline. It isn’t rocket science but it also isn’t so simple that it won’t ever happen. These 5 tips are the foundation on which I believe being debt free is not only possible but inevitable.
Have a Budget….Seriously
I mention how important a budget is pretty much every day. Don’t believe me about how important it is, then ask any credible financial planner. The budget is the guide from which you control spending and increase saving. When you don’t have a budget you will inevitably spend more than you make. When you have a budget you will know exactly what you make, which sadly some people do not know. You need to know your obligations as well. Knowing the big ones like your mortgage, cable and hydro are important. The little ones like gas, memberships, and leisure are equally important because it is those ones that often cripple people. You wouldn’t believe how many people say they can’t afford to save yet they spend $2,000 a month on restaurants and booze. Limiting your variable spending will keep your budget tight and efficient. The budget is the foundation of any successful financial plan. Why do you think I named the website Budget Boss?
Solid Emergency Fund
I spoke about the perils of not having an emergency fund on Tuesday. Having one protects your assets and protects against the events that you might not be able to predict like injury or illness. Where many people fall into problems when they don’t have an emergency fund is that they will put the day to day expenses on their credit card or line of credit. When it comes time to pay the bill at the end of the month there is more bill than money. They then carry a balance into the next month and the cycle continues. That is why a budget is important and that is why an emergency fund is important. The two work hand in hand. You never carry a balance because you always have enough savings to cover any credit balance. When larger problems strike and they will, you can pay them with your own savings instead of using credit. A new transmission for the car shouldn’t set you back a year. Small credit card balances should be handled monthly. If you have a solid emergency fund and a solid budget you will never, ever be in debt.
I Just Became Debt-Free…Now What??? – Budget Boss
Pay yourself first, investment accounts
I have mentioned this one before as well. Paying yourself first is vital and that include your emergency fund and investment accounts. After you have created your budget and made an adequate emergency fund, paying yourself first becomes the top priority. The money has to go away so you won’t blow it on nonsense. It also has to go away right away because it is the discipline and forethought of long-term saving that prevents people from accumulating debt. If you have the power to save for the future then you probably have the discipline to not get into debt. Paying yourself first also includes paying off debt as paying it off helps increase your net worth. If you are aggressively paying off debt, you are also probably not accumulating debt.
Adequate Insurance Coverage
As mentioned in the emergency fund segment, the unexpected can hurt your financial plan. Having emergency savings is vitally important but it is insurance that protects you from the catastrophic events. Things like injury, illness and even death have the power to ruin any financial plan. Most people’s emergency funds cannot support you for several years. Insurance, however, can take you from any age to retirement if you have the right coverage. Proper Life Insurance can ensure that your spouse doesn’t go into debt if you die and the kids still go to college as well. It is important to understand that the purpose of insurance is not to make anyone rich, but in fact to allow life to continue without financial hardship. Insurance is debt prevention 101.
Stable Employment
One of the greatest threats to your personal financial well being is inadequate employment. It is crucially important to have a steady and sufficient amount of income coming in every month. I have told several of my clients that they just don’t make enough money. This is why the proposed minimum wage increase is so very important to our economy. There is a certain line where poverty exists and not much can be done in terms of planning once one resides in that area. This also means that one must have a job that provides stability and long-term potential. When you know what your future employment will be, necessary adjustments can be made. When you are consistently unemployed or underemployed it becomes extra difficult to make a stable budget and then debt rears its ugly head.
8 Stable Career Choices for Canadians – Monster
Being debt free is not some string of luck unless you hit the lottery. Being debt free forever requires dedication, patience, preparation, and discipline. We all know how crappy debt is and none of us want to be in debt. If that is true then why do so many of us find ourselves in debt? I think the main reason is that people have a hard time distinguishing between a “need” and a “want.” If we make it our priority to take care of all our needs and limit our wants than it becomes much simpler. If you can satisfy these 5 areas, which are “needs,” then debt freedom will be yours. The question then becomes: “How badly do you want to be debt free?” The answer should be simple.
“The newness effect of a new thing wears off in nine months to a year, but financial security can last a lifetime.” – Dan Buettner
Debt Freedom