How to Stay out of Debt

This article assumes you have been in debt at some stage, are now debt free, and you want to stay out of debt. This is the age of instant gratification. Everybody wants something now, this instant. Nobody is prepared to wait.

Most people will agree that a debt incurred to purchase a house is unavoidable. This debt is called a mortgage. Given that it will take quite a while to repay, several years in fact, most people would be happy to say they finally own their house.  However some people can’t see the sense in having a huge amount of capital tied up in their house once it is paid off. Some people don’t even wait to actually pay their house off before adding to the debt to install a swimming pool, go overseas on a holiday and so forth. Treat the house debt as a house debt and don’t go adding to it. Get it paid off as soon as possible.

There is nothing like the sense of actually owning your own home. If you want to stay out of debt don’t act a guarantor for anybody. If you do then if you are called upon to settle a debt because of default from the borrower you will go back into debt. Worse still you may even have to sell the house. 

By the time most people have paid their home they are near retirement. The world abounds with schemes to invest money and so add to savings for a comfortable retirement.  Don’t re-mortgage the house for any reason at all. Bear in mind it took almost a lifetime to repay the mortgage why go back into debt? If you re mortgage your house to invest in a scheme there is always the risk of failure. At retirement age you do not have the luxury of years it would take to recover if your investment does fail.

Most people would advocate paying cash for everything. This might sound good but in this day and age it is outdated thinking. It is  essential to have a credit card. Hotel bookings, Internet purchases, airline tickets are just a few of the things that require you to have a credit card.  Most credit cards have an interest free period and do not charge interest if the debt is paid in full each month. However once you get on the debt treadmill by not paying the bill in full each month then it seems like you are doomed to a lifetime of debt. In fact, if you having been making the minimum payment each month on a regular basis you are quite often rewarded by a letter offering to extend your limit.  Don’t extend your limit. Budget your income so that you have money set aside to pay the bill in full each month.

Outside a house purchase your car is most likely the second major reason to incur debt for its purchase. It is difficult to stay out of debt with car purchases. Resist the urge to trade in your old car every two years. Cars are now built with some warranties offering five years. In that time your car should have been paid off. If you can make the car last another five years put the car installment money into a separate account to go towards the purchase of the next car. The difficulty here of course is to stick to the same car for ten years, pay if off in five years and actually save the monthly installment for another five years without touching it.

Time and time again articles stress the importance of budget. Basically, live with your means, spend as little as possible and save as much as you can. The opening paragraph stated that most people don’t want to wait. They want everything now. With that attitude, then it is almost impossible to stay out of debt. There may be a way however.

During the year you will have unavoidable expenses. These will be either rent or mortgage payments, car payments, electricity, rates if a home owner, various insurances and so forth.  Make a list of all these expenses, total them up, divide by twelve and put this money into a separate bank account . In time you will always be able to pay your bills. Each year add ten percent to cover increases.

Next examine what you spend each month on a credit card.  Add up all the bills for the last twelve months and then divide by twelve. Bank this amount each month into a separate account.  Only spend this amount each month on your credit card.  If for some reason you overspend then you will have less to spend the following months until your debt can be paid in full each month.

After subtracting the amounts required for the above you will arrive at hopefully a surplus. This amount can be banked into a third account. This money can be used for day to day expenses such as groceries entertainment etc.

Debt is part of our life. It is essential if we don’t have a huge sum of money available to make a purchase but have the ability to repay it over a period of time, for us to incur a debt. Too often however we allow a “need” to purchase to be confused with a “want” to purchase. It is these “wants” if though with bit a thought could have been avoided, that doom a lot of people into perpetual debt.