Debt is a big problem in our society. I know this first-hand from the number of emails I receive from people who have found themselves in debt. This is why I’ve written a lot about debt recently, particularly about how to get out of debt using services such as debt consolidation (where all your debts are amalgamated into one, more manageable payment), bankruptcy (where this is a legal process that has long-term consequences) and their alternatives.
Now we are going to look at how to avoid a debt crisis in the first place, with help from Second City Advisors. Avoiding debt is (obviously) far more preferable than trying to get out of debt once you’re in it, right? But do a comparative search on the web and you’ll find far more content, advice and comment on dealing with debt, rather than avoiding it.
The problem with debt…
Is that it can hang over you like a gloomy cloud. It’s hard to stop thinking and worrying about it, let alone pay it off. It’s no wonder that financial issues are a cause of stress and depression. So avoiding debt in the first place is much better for our mental health and wellbeing – as well as the obvious benefit to the all-important credit score.
Avoiding debt is not easy…
Most of us are so accustomed to using credit, loans and financial services that incur debt, we are almost conditioned to it. It’s so easy to use debt as a solution because it serves instant gratification and convenience. Avoiding debt is more difficult (at least in the short term) as it required a big adjustment, sometimes drastic, to make part of our personal make-up. Our whole society and economy depend on the majority of people being in some form of debt, so we’ll be rebelling against societal norms!
Second City Advisors: How to Avoid Debt
We’ve got five tactics for avoiding debt below. Follow some, or all, it’s up to you. Eventually, to stay ‘off-grid’ from debt you will have to follow all of them, but take on each one-by-one whilst you make the personal adjustments.
1. Stop using your credit cards
The big one first! You might not want to start with this one but this is the one that will have the greatest impact and benefit to avoiding a debt crisis. Credit cards are only an effective credit solution if you intend to pay off the debt quickly and in full. But so many people use them as a long-term credit solution – often using a rolling credit for years and years. The interest rates for these are massive and crippling! There are much better ways to finance long-term expenditures, which we will come on to. So cut up your credit cards – take the scissors to them – it’s the only way you’re really going to stop using them for good.
2. Second City Advisors: Use more effective loans that you can easily afford the repayments
There are more effective ways of funding expenditure using cheaper loans that offer lower interest rates and longer payment periods. The repayments will be manageable within your current finances and therefore more predictable and accountable in your monthly outgoings.
Loans secured against your home or other asset will be cheaper than unsecured loans, because the loan provider has less risk if you default. In turn, this makes the loan cheaper to you. I am not advocating being reckless with the roof over your head; quite the opposite. The alternative is an expensive loan that you struggle to repay and risk damaging your credit score. That would mean any future credit would be even more expensive and risky to you. In summary, secured loans are a popular way of making debt more affordable to you and less risky for the lender.
3. Save a little before using debt
This is a very neat trick that I want you to consider as the ‘standard’ way of approaching debt. One of the reasons why people using credit and credit cards is that they can purchase an item now rather than waiting until they have saved the purchase price before acquiring it.
This tactic is a half-way house. It involves saving three month’s worth of loan/credit repayments before you use finance to purchase. This means that you won’t be purchasing the item straight away, but you won’t have to wait forever either. This method gives you can important and reassuring buffer to continue making repayments should you lose your income of suffer a financial setback. You’ll have three months to rectify issues over the lifetime of the loan or credit repayment.
4. Even for smaller items, wait one extra day before purchasing
Spontaneity and impulse are responsible for many people making credit-based purchases of items that they do not really need. New sneakers; a new pair of jeans; a new iPhone. Whatever it is, impulse buys are dangerous because we create unplanned debt at a high cost.
One way to avoid the painful consequences of an impulse buy is to counteract it with hard discipline. It requires you to ‘sleep on it’ and, if in the next day, you still really, really, really want the item, then go ahead. You’ll find, using this method, that many of the purchases you may have made impulsively are instead avoided.
5. Don’t buy stuff when angry, drunk, high or emotional
Many expensive, unnecessary or unwanted purchases are made when emotional states are high. I’ve bought things myself, after having a few pints of beer at my local pub, only to regret it the next day. Or maybe you have bought yourself something to cheer yourself up, like a $5,000 hi-fi system. The convenience of online shopping with Amazon, Ebay, etc (especially the one-click kind of purchasing) means it is very easy to make a purchase, even if you can’t see straight!
You may have to switch off the one-click buying options, and do whatever it takes so that you make purchasing difficult if you don’t have your head screwed on right.
