Each year, thousands graduate from the InCharge debt management program and embark on a new life, free from monthly credit card payments. Getting out of debt requires hard work and commitment and nobody knows this better than our alumni. But what about the future? How can we all debt-proof our future?
1. The 85% Rule. Never live on more than 85% of your income. Find the savings, whether you need to chop 1-2% of out each budget category or rid yourself of a few categories altogether. Cut cable, clip coupons and find a cheap pay-as-you-go phone to replace your unlimited iPhone plan. Are you expecting a raise this year? Forget about it. Don’t adjust your lifestyle to your new income if you are living paycheck to paycheck. Once you’re able to put away 15% of your earnings, number two will be a breeze.
2. 6+ Month Emergency Fund. Many financial advisors recommend a 3-6 month emergency fund, but the reality is that people need at least 6 months. If you’re in your 20s, 6 months is probably fine, but add a month for each decade of life after that. If you lose your job in your fifties, you’ll need 9 months to find new employment. Yes, it takes a long time to save up nearly a year’s worth of salary. If you don’t, you’ll pay more in interest, fees and penalties from money borrowed or taken from your retirement to cover an unexpected job loss or illness.
3. Maintain health insurance. Bankruptcies caused by medical debt account for 60% of total filings. Living without health insurance is a major threat to your financial future. Not only does a health insurance policy guarantee help with paying for medical services and prescriptions, the costs of these items are significantly lower than they would be without insurance. Believe it or not, doctors and hospitals routinely charge uninsured people double the insured-rate. This is because insurance companies pre-negotiate discounts for their clients.
4. Don’t Co-Sign. When you co-sign for a friend or relative, you are putting your credit standing and financial security at risk. Understand that you are 100% responsible for the total loan when you co-sign. If you want to lend a helping hand, find other ways like guiding your friend through a budget or letting a relative stay with you for a few months while they get back on their feet.
5. Say Goodbye to Your Car Payment. If you’ve managed to climb out of credit card debt like so many of our clients, the next logical step is to join the 20% of Americans who live free of car payments. Did you know that the cycle of financing expensive new cars every 5 years could sap over $1 million from your retirement nest egg? In fact, car payments may be what prevent you from owning your automobiles outright.
Karen Carlson is the Director of Education and Creative Programs at InCharge Debt Solutions. She enjoys frugal living in Orlando, FL with her husband and children.
Connect with Karen on Google+: Karen Carlson