Action Plan: How to Stay Debt Free

Remember how easy it was to fall into debt? A few purchases here, a couple more credit cards there, and suddenly you owe way more than you ever imagined you could. Once you get out of debt, don’t let it happen again! Learn from your mistakes. You can change your financial habits and money management, if you’re willing. Here are some words of wisdom:

Old Habits vs. New Credit

Kick the credit card habit. Keep only one or two cards (with the lowest interest rates you can find) for emergencies, but pay for everything else with cash or checks.

Don’t charge things you can pay for up front. Got a big ticket item in mind? Save up for it. And don’t let discount offers lure you into opening credit accounts you don’t need. Sure, you might save 10% on your purchase, but if you wind up paying interest, chances are, it will erase this small upfront savings. It’s not worth it!

If you must charge something to a credit card, pay as much as you can toward the very next balance, not just the minimum. Better yet, use your debit card instead of a credit card. This way you can’t run a balance or spend more than you have in your bank account, but you can still have the convenience of paying with plastic.

Establish an Emergency Fund

If you haven’t already, start an emergency fund for life’s unexpected surprises. Remember, roofs eventually leak, clutches wear out, and pets get sick—and all it takes is one unplanned expenditure to throw your budget into a tailspin. Set aside whatever you can from each paycheck, then put it in an account you know you won’t touch.

Have a Vision

Once you’re done paying off debt, you’ll have no excuse not to save for your retirement. Think Social Security is going to take care of you? Think again. Don’t count on your Social Security benefits for an extravagant lifestyle. In fact, the average payment right now is only $8,500 per year — are you prepared to live on that? If your employer offers a 401(k) plan, take advantage of it. Or start an Individual Retirement Account (IRA) on your own — or do both. It’s not difficult, and it will put some sparkle in your golden years.

Not all Debt is Bad

Remember that some debt is essentially unavoidable. Very few people have the resources to pay for a car or house in full, so most of us must make payments. What you want to be sure of is that you don’t saddle yourself with a loan that makes it so you have to borrow to pay your monthly bills. If you do take out any new loans, make sure you understand how much you are paying in interest. This way you’ll better understand the total cost of the item, with interest included. The best strategy is to try to save up as much as possible. A substantial down payment on a car will save you a lot of money in the long run. Putting off large purchases for a few months to save up funds can often make a huge difference.

All of these strategies can help keep you from falling back into a debt trap. The most important things to remember are:

Avoid new, unnecessary debt

• Save up for the unexpected

• Plan ahead so you’re prepared for the future

• Take on new debt wisely, for the right reasons

Good luck!