BY: RACHEL RICHARDS, AUTHOR OF “MONEY HONEY: A SIMPLE 7-STEP GUIDE FOR GETTING YOUR FINANCIAL $HIT TOGETHER.”
Thousands of financial gurus have written articles on how to get out of debt (see Part Two of this series, “5 Simple Steps to Get Out of Credit Card Debt”) but hardly any on how to stay out of debt. So if you’re one of the lucky few who have recently clawed your way out of debt, this article is for you. Because the last thing you want is to go back down that hole, especially after all your hard work.
Without further ado, I present 10 must-know tips for staying out of debt… for good.
1. Keep a journal during your debt pay off journey
Technically, keeping a journal would need to be done as you were paying off debt. If you’re already debt-free, this tip doesn’t apply to you. If you’re in the middle of your journey, however, I highly recommend writing down your feelings about money. Write down the negative and the positive. Think about both progress and setbacks you experience along the way. How does debt make you feel? What does it hold you back from doing with your life? What will paying it off mean for you and your family? How do you feel after hitting another debt pay off milestone? Most importantly, how do you feel once you’ve eliminated all debt? Why don’t you ever want to go back into debt again? Having these thoughts to reference will be extremely important during any future mishaps. This may be the most persuasive thing that your present self can do for your future self to ensure that you stay debt free for good.
2. Cut up your credit cards and/or use only cash
Have a credit card cutting party! This step, while scary, is incredibly freeing. That’s because physically cutting up your cards is the only way to ensure you won’t continue to use them. Yes, this can feel terrifying. The instinct is to cut all of them up except one, to keep for emergencies, you know, just in case. Having that “safety net” can bring a certain peace of mind, but do you really want to open up the possibility of going back into debt? Chances are you’ll find a way to pay for an emergency even if you don’t have that CC tucked away somewhere. So as vulnerable as it may feel, it’s for your own good. Now grab a pair of scissors and get to it! To get even more extreme, don’t even use debit cards anymore. Just stick to cash. Paying with cash is the only way to truly get visibility into how much money you have left. You can’t overspend if you’re using cash. If it’s not there, you can’t buy anything. I highly recommend reading “Total Money Makeover” by Dave Ramsey if you’re serious about transitioning to a cash-only system.
3. Don’t stop monitoring your expenses
Just because you paid off debt doesn’t mean you can start slacking on the budgeting side of things. Often, people feel so relaxed and unworried about their finances after paying off debt that they stop paying attention to their spending altogether. This is a surefire way to slowly creep back into the old habits of overspending. These days, apps like Mint and YNAB make this super easy, but even a good old-fashioned Excel spreadsheet will do the job. Keep careful tabs on both your monthly after-tax income and your monthly expenses so that you keep your spending in order.
4. Adopt a frugal mindset
Getting out of debt doesn’t mean life is now a free-for-all. You must adopt and maintain a frugal mindset and live within your means. You’re not suddenly rich or wealthy just because you don’t have debt. Having no debt does not justify expensive shoes, new SUVs, or fancy dinners. Treat raises the same way: if you get a raise, do not spend more money. I highly recommend reading “The Millionaire Next Door” by Thomas J. Stanley, which will help you understand that even millionaires live frugally. There’s no sense in Keeping Up With The Joneses if the Joneses are up to their eyeballs in debt.
5. Save more money
Following along the lines of monitoring your expenses and living frugally, the best thing you can do to keep from going back into debt is to save more money. Let’s say an emergency car repair comes up. You recently paid off your credit card debt but you have no means to pay for the repair. What will you do? You’ll probably have to charge it to your credit card, since you don’t have any savings cushion. So think about it: having a savings account for emergency expenses will ensure that you never charge to your CC again. Make sure you have enough money set aside so that when, not if, an emergency comes along, you won’t have to use your CC to pay for it. In my book “Money Honey,” I recommend setting aside $1,000 in an emergency savings account first, and then working on saving an additional 3 to 6 months worth of living expenses, which will hold you over in case you lose your job. (You can see a whole excerpt from this chapter of my book here)!
6. Stay insured
Staying insured goes hand in hand with saving more money. The point is to prepare for and eliminate any possibility of an unexpected or emergency expense. Since emergency medical expenses tend to be the most costly type of expense, staying insured is vital. There is no question about it: you should never risk living without insurance. Yes, insurance is expensive. Wanna know what’s more expensive? Not having insurance at all, which could lead to hundreds of thousands of dollars of debt or even bankruptcy. It’s a risk that few can afford to take.
7. Sell assets in a crisis
Let’s say that an emergency does come up, and you’ve done all the right things. You’re insured and you have six months of savings stowed away, but is still isn’t enough. You might feel like resorting to that trusty old CC. Stop. There are still other options. Most people have at least a few assets or valuables to their name: a house, a car, a laptop, a smartphone, an extra fridge in the garage, an engagement ring… you get the picture. The alternative to using a CC is to sell some of these assets. You heard me. Sell them. Sometimes, to preserve your financial integrity, sacrifice is required. The way I see it, if you have only two options to pay for something and they are to 1) use a CC or 2) sell your car, you have a choice to make. Living temporarily without a car will be inconvenient, but isn’t it better than going back into debt? This sounds extreme to some, but the point is to remember that there are almost always other options available to you without going back into debt, you just have to get creative and sacrifice.
8. Maintain additional streams of income outside of your job
If you think about it, having only one source of income is a bit risky… sort of like putting all your eggs in one basket. If you lose that one stream, you have zero income. You can exponentially lower this risk by having multiple streams of income. Income falls into two buckets: earned and unearned. You typically have to trade your time in a full- or part-time job for earned income. Unearned, or passive income, is money you make without working. Think rents, royalties, and interest. You can invest in rental properties or even rent out a room in your house. You can write a book. You can invest money in an interest-bearing account. The possibilities are endless. Even if you only create one additional stream of income, that’s better than nothing.
9. Make things easy for yourself
I have two recommendations here. The first is to set up autopay on everything: your mortgage or rent, utilities, cable, WiFi, and any other bills you have. That way there are no accidental late payments and you never have to think about it. You can relax knowing that you don’t have to lift a finger and everything will be paid (assuming the money is there to pay it, so make sure to monitor your accounts). My second recommendation is to unsubscribe to emails that alert you of sales, i.e. remove all temptation. When you see an email alerting you of a sale, it’s so easy to get caught up in the urgency and buy your favorite item now! 50% off available for 24 hours only! Instead of even having to engage in the mental battle of “to buy or not to buy,” what better way than to simply unsubscribe? As they say, ignorance is bliss.
10. Talk about money
We need to break the stigma of talking about our finances. First of all, let’s be real: everyone struggles with money. Opening up to a friend or family member will often result in a sense of relief from both parties. It’s good to know that you’re not the only one that finds money management difficult at times, and it’s also helpful to vent or seek advice from someone you trust. Having regular conversations about money and knowing how other people manage their money will give you tons of insight on what you are doing well and what you could be doing better. And having regular check-ins or money dialogues will keep you in tune with your goals and your desires so that you can adjust your behaviors accordingly. Talking about money is vital to not only staying out of debt, but to continuing to hit your financial goals in general!
Got questions? I’ve got answers. Contact Rachel at firstname.lastname@example.org and get yourself a copy of “Money Honey” at http://amzn.to/2sdrolF. Be sure to follow Rachel on Facebook at www.facebook.com/moneyhoneyrachel and on Instagram at www.instagram.com/moneyhoneyrachel.