This is a Patch Your Pocket Community Post, written by Nicholas Green. To inquire about writing a community post for us, please email us at [email protected]| Community posts are edited and posted by the Patch Your Pocket team.
It shouldn’t surprise you that the majority of consumers are spinning in the whirlpool of debt, which leads to a never-ending mist of unpaid credit cards, rising fees, and interest on loans, and what not! There are 3 simple things you can do to keep debt away.
While it may seem challenging, there is a way out of debt. The meaning of debt is that something is owed, and that’s what you need to avoid because it’s hard to be successful when you owe others money.
Doing these three simple things with debt will unlock your money management skills, which will help you become financially invincible.
1) The Only Kind of Debt You Should Have Is Debt That Makes You Money
Most of the debts that we tend to have around us are not going to increase our net worth. They are from companies that want to make money off you.
Debts fall into two categories. The first one is good debt, which has wealth-building characteristics. The other is bad debt (also called general consumer debt) that has no use in increasing your net worth.
Your job will be to distinguish between these two types and only choose to have good debts.
Examples of good debts typically include mortgages, auto loans(sometimes), personal loans borrowed for forming lucrative businesses and investments, student loans for achieving successful career goals, and so on.
But, most of us have less of this kind of debt, and more bad unsecured consumer debt. Bad debts include credit cards, payday loans, excess student loans and debts due to bad investment decisions.
Another benefit of good debts is that they generally have low-interest rates, compared to those of the consumer debts like credit cards, or payday loans. Therefore, you should make sure that if you are going into debt, it falls into the good debt category.
Otherwise, avoid having debt at all costs.
2) Don’t Get Into Debt Just Because You’re Approved for Something
Offers, rewards, and pre-approved credit lines are of course attractive words to hear.
It’s not that they aren’t good, but shouldn’t you be a bit curious, as of why these banks want you to have such benefit? What’s in it for those banks??
These companies aren’t out to give you anything for free. There’s a reason behind everything. These banks want you to have multiple credit cards and high interest loans because that is how they make money.
They are 90% worried about their profit, and a mere 10% worried about how their venture will help you. Getting into debt with these offers comes with a cost. If you fall into their traps, it will be difficult to increase your net worth or be in good financial standing.
Most of pre-approved credit cards and personal loans don’t come at a low cost, do they? High-interest rates and penalty fees on late payments are their inert characteristics.
I hope understand which way the wheel is spinning. Just because they have approved you something, you don’t need take the offer! Make up your own mind and decide about it logically.
3) The Ratio of Your Savings to Debts Should Always Be >1 : 1
You have to pay attention to your own savings to debt ratio!
Why? If a situation requires you to pay off your debt in full, will you be able to do that immediately?
Say, for example, you made a big purchase on your credit card of a few thousand dollars. You can obviously make the minimum payments, but do you have the ability to pay it off in full, right on the purchase date?
Or, in a more simplified way, are you buying things with credit cards that you can buy with your debit cards too?? If not, then that’s the mistake.
You can measure your own debt profile by calculating the ratio of your total savings to the total debt you have. Mind you, I am not saying income—I am saying SAVINGS clear and loud. So, if your total savings is $1000, and you have a debt amount of $500, or $700, then it’s not a bad ratio.
But, if you have a total debt amount exceeding $1000, then that’s a problem. The ratio should never fall below ‘1’. If you think that your ratio is at the tipping point (like if your savings is equal to your debts) then you should address those debts.
There are several debt relief options like settlement, debt consolidation, and many others like them. Consult a financial expert, then choose the best option for paying off your debts and bring back your debts to zero without compromising your savings.
That’s all three ways to stay out of debt. I wish you the best on having a debt-free life!