Debt Doesn’t “Just Happen”: Warning Signs to Watch For
I was horrible with money. As a child it burned a hole through my pocket. As a teen, if I had it I spent it. In my twenties, I made good money and spent like I was a rock star.
Debt was my best friend.
The average U.S. household with debt carries $15,355 in credit card debt and $129,579 in total debt according to The 2015 American Household Credit Card Debt Study.
Even though debt is not a necessity to have the things you need and want, it is easy to get caught up in the trap of thinking you can “pay for it later.”
Worried you might be a slave to debt, or headed in that direction? Here are some warning signs…
You Don’t Have a Budget
When you don’t have control of your money and finances, you are at risk of going into debt. Its a simple fact.
A budget allows you to the freedom to tell your money where it’s going and opens the door to savings. It gives you a clear black and white picture of what you have and what you can spend.
The key to staying out of debt, yet having the freedom to purchase the things you want and need, is being able to save up for them and pay cash. Budgets help you do this by allowing you to control your money not the other way around.
You’re Living Outside Your Means
When you find yourself struggling to make ends meet every month, you’re living outside your means. When you have more going out than coming in, you are living outside of your means.
A lot of us get caught up in the trap of trying to keep up with the Jones’s. I say screw the Jones’s. If you don’t have $2000 chilling in the bank to buy that awesome new TV that Bob down the street has, you don’t need it. And having the credit available on your Mastercard DOESN’T COUNT!
You Don’t Have an Emergency Fund
An emergency fund is money set aside for, well, emergencies. You should have at the very minimum $1000 set aside for emergencies.
Vacations, a great sale price on a designer dress, and routine car maintenance are not emergencies. You should have money budgeted for these things. Emergencies include unexpected hospitalization or death in the family, car accident or sudden unemployment. When you don’t have an emergency fund and a true emergency arises, you may be forced to use a credit card, take out a loan, or in some other borrow in order to handle the expenses.
Eventually you want to grow your emergency fund to the point where you have enough to cover 6 months to 1 year of your salary. But $1k is a great place to start, and should be your immediate goal if you aren’t there already.
You Believe You Must Incur Debt in Order to “Build Your Credit”
This is the worst of all the myths where debt is concerned.
You probably remember your parents teaching you that you have to build your credit and have a long history in order to buy a house or car.
Truth is, you can have nice things without going into debt, including nice homes and cars. The “trick” is budgeting, saving and planning so that you can pay cash. If you don’t feel like paying cash for your home is a reality (it certainly wasn’t for me!), learn to differentiate between good debt and bad. A mortgage is probably considered by most people to be good. Charging a trip to Tahiti with the girls on your Visa, with the plan to pay it later, little by little, is NOT.
By knowing the warning signs, and taking the time to organize your money, you can avoid the misery debt brings with it and enjoy the good things in life!