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How to avoid getting back in debt after finally climbing out

How to avoid getting back in debt after finally climbing out

May 17, 2021

The use of debt is sometimes necessary, and sometimes beneficial. However, in our professional we often see the impact that debt has on the emotional well-being of individuals, particularly the use of certain types of consumer debt such as credit cards and personal loans. When an individual pays off debt, an emotional burden is lifted, and it can be an exhilarating experience. This is why Dave Ramsey’s radio show has become so popular for individuals calling in and screaming at the top of their lungs “WE’RE DEBT FREE!!!”

When debt payoff takes place, it is often the result of a lot of self-discipline and hard work and should be celebrated.

A question we received at a recent webinar we hosted was a good one. It was: “I just got out of debt; how do I avoid going back in debt.”

This is a great question. For this blog we will focus specifically on the type of debt we see abused quite a bit: credit cards. Let’s look at 10 ways to avoid going back into credit card debt. We’ll cover these rather quickly but if you’d like to talk over more in-depth, give us a call.

1) Pay for a detailed financial plan

Financial plans are not cheap. Depending on the complexity, they might run between $1,500 and $5,000 for individuals (maybe even more if you own a business).

However, the amount of money you save by following the plan should more than cover the cost and then some. It should place you on the right track financially to ensure you do not fall back into the same lifestyle that led you to falling into credit card debt in the first place.

Spending is behavioral. A good financial planner can work to understand your attitude towards money along with your spouse’s, and coach you on the best way forward to ensure you can make wise spending decisions for you and your family.

2) Build up an emergency fund

Consider taking what you were spending on your debt payoff plan, and instead of paying a lender, pay yourself! Start a separate bank account and pay that bank account the same dollar amount each month that you were paying off your credit cards with. Once you get to a dollar amount that is equal to 3-6 months’ worth of living expenses, now you have a fund you can tap into if an unexpected expense comes along or if you suddenly lose an income source.

By the way, the most common thing that leads to credit card debt is when people simply are not expecting an expense and they don’t have an emergency fund set up. It’s understandable, what other choice do you have at that point?

3) Stick to a budget

There are several different options you can choose when setting up a budget. The main thing is that you find a method that works for you. We’ve recently written a blog post about budgeting and if you have had a hard time find a budgeting method that works for you, you will find this post helpful.

4) Set up multiple bank accounts

Consider having an account just for your auto-draft bills. The bills that are essential to your well-being. Then set up a separate bank account for your non-essential bills. Call your HR department and have them split your direct deposit so that enough of your paycheck is going into that first bank account to cover your bills, and the rest goes into your discretionary account.

5) Pay in cash

Holding cash in your hand can be powerful. It helps you to know just how much you’ve earned and how much you have to spend. Emotionally, it is far more difficult to spend cash than it is to swipe a card. If you keep cash, you will be less likely to spend it on frivolous things and more likely to keep it on hand for a rainy day.

6) Avoid impulse purchases

Walking through the store or browsing on Amazon can lead to a lot of temptation, and it can be challenging to establish between a need and a want in the moment. Here’s an idea to help you avoid making impulse purchases. At the beginning of each month, try and identify any purchases in addition to your normal groceries and household items you might need to make in the coming month. Set a dollar amount (for my wife and myself it is $100). If throughout the month you recognize a need or a want to purchase an item over your set dollar amount, rather than purchasing it immediately, instead make note of it. Then sit down with your spouse to talk it over together and place it on next month’s budget. This is a far more controlled and level-headed way of making a financial decision. By sleeping on it you can better understand if it is truly a purchase that aligns with your long-term financial goals.

By the way, this only works if you have established what your financial goals actually are. Without establishing life goals and savings goals, people tend to fall into a “whatever-feels-good-right-now” type of mentality which essentially means you will end up spending far more in cash than you really need to.

7) Shop smarter

Recently we signed up for a service where they bring your groceries to your front doorstep for a fee. To some it might not make sense, you are paying more when you could simply go out and buy the groceries yourself.

However, what we did was we considered how much time that person is saving us by doing our grocery shopping for us. In other words, we calculated our opportunity cost. With an extra couple of hours, we determined we can be far more productive and make a lot more money than what we would have saved had we done the shopping ourselves. Sometimes saving money means spending it wisely.

8) Do not close out credit cards

Okay, this might not be a tip on staying out of debt, but it should still be mentioned: when paying off credit cards, do not close them out.

Part of what determines our credit score is the history of credit usage. If you close out a credit card, essentially it means that credit card is not actively contributing to your credit score anymore even though the history with that credit card company is very meaningful to your score if you keep it open. It is likely you will actually lose a few points off your credit score by performing the simple act of cancelling your card.

9) Cut up the cards.

Just because you do not close them out, doesn’t mean you can’t cut them up! If you do not plan on using the cards in the future so you can stay out of debt, then there’s no reason to keep them around. Doing so can just cause unneeded temptation.

10) Shop around for best prices.

The last tip for spending within our means is by not overpaying for items. Amazon is not always the cheapest so don’t assume it is. Shop around, look in local shops. This might sound extreme but take a class and learn the art of negotiation. You’d be surprised at how doing so can save you tens of thousands over the course of your life as you negotiate big purchases.  

If you can get on a plan to avoid spending more than you make, you will be on the path to a better, more secure future.