I absolutely detest debt. The idea of having a financial obligation as a monkey on my back is not something that works for me.
By carrying debt, and using cash flow to pay it off, you’re not directing income toward savings. By postponing savings, you’re forcing yourself to work more – whether more hours during the week or month, or for more years in total. To me, financial freedom is a long-term goal, and debt inhibits the accomplishment of that goal. Most of us would like to reach financial freedom, right?
So, with that in mind, I have come up with 5 rules for staying free and clear of debt:
- Visualize Working Hard While Old. Does this take you by surprise? Well, I know it’s a bit unusual, but it’s what works for me. Give it a try, and think about it. Realizing how people that are well past traditional retirement age tend to have less energy and more health issues that those of us much younger, it stands to reason that we don’t want to be in that position of having to work then. Envisioning it is a real motivator to avoid debt, and free up cash flow for retirement savings.
- Pay Yourself First. Put money away for yourself upon receiving it through your income. Set it aside, then forget about it. Well, don’t really forget about it, but make the effort to prioritize savings. This way, if you really need money for whatever reason, you have it. You won’t have to go into debt, and can prevent such a situation from arising.
- Pay Off Credit Cards in Full Each Month. No matter what you might charge within a given month, focus on debt reduction and make a plan to have it paid off in full when the bill comes due. Interest charges and late fees can be very costly. If you do have it, pay down debt without taking from other sources. For example, using 401k for credit card debt.
- Know Your Expenses. This can also be seen as learning how to budget, or spending within your means. Either way, the key action point is to understand where your money goes, and how much you can effectively spend each month. And part of knowing your expenses includes knowing wasy to reduce those expenses; for example, if you have to make home improvements, think about shopping around, getting multiple bids for work, and remembering the 2011 home improvement tax credit. Bottom line: know what you’re spending and how it can be smartly reduced.
- Discern Wants from Needs. There are some things that are needs, such as food, shelter, and basic medical care. Then, there are are similar things that are wants – an expensive dinner, a newly constructed McMansion, or cosmetic vanity procedures. Or, more pervasive, smaller expenses that chip away at your cash flow. Wants are wonderful, and needs are just that: things you need. Understanding this distinction can help you get out of debt, or avoid it altogether.
Do you have any rules for keeping out of debt?