Stay Out Of The Debt Trap with These Money Saving Tips
Massive personal debt causes a household to live as slaves to creditors. Long before a debt crisis arises, the money manager must learn to manage the monthly income and avoid the need for credit relief or debt consolidation from the outset. Debt payments place unnecessary strain on the financial health of any family. Paying for past purchases is avoided by adopting new habits that force the family to live within its means.
Studies have shown that families who live by a budget are more likely to reach their long-term financial goals. Detailed budget exercises will teach the money manager where every penny is spent each month. Monthly payments must be evaluated to determine if the expense is essential or important to the life of the family.
The household budget is constructed based on the prior three months of actual expenses. Unnecessary expenditures can be eliminated immediately.
Every dollar of income must be placed in a specific budget category. A “miscellaneous” category will cause money to be spent and budget control to be lost. The “entertainment” and “eating in restaurants” categories are essential for the tracking of major spending traps. Entertainment choices contribute to the ability to save money more than any other daily decision. Budget limits will constrain this category to prevent overspending resulting in unnecessary debt.
Frequency of the paydays will determine how often the budget is reviewed each month. Paychecks that arrive on a weekly basis must be managed on the same weekly interval. Saving the first ten percent is a good guideline for short-term and long-term saving efforts.
Casual use of credit cards starts a pattern that is difficult to break. Any household that is carrying debt will begin to use the credit cards to make purchases that sustain the household until the paycheck arrives. This habit will overwhelm the household budget. Debt consolidation is avoided if the credit cards are not used every month. Cash withdrawn from a bank account is assigned to a budget category immediately.
Refuse spontaneous purchases
Reaching for a credit card to pay for a last-minute item will cause unnecessary strain on the household budget. Cash purchases require some planning, price comparisons and careful consideration. Debt is avoided when the entire household commits to spend in the applicable budget category within the monthly limit.
Spend less money
A well-known financial advisor decided to experiment with the idea of spending cash for every purchase for an entire year. He paid bills with cash and even bought airline tickets with cash. At the end of the 12 months, he realized that he had spent 30 percent less money than the year before. The act of counting out dollar bills made him walk away from many purchases.
Eliminate casual spending
Store credit cards are laced with gimmicks that cause consumers to spend more money than is affordable according to the household budget. Convenient forms of currency will reduce the awareness of the cost of purchases that might not be necessary in the current month. Cash purchases will cause the spender to realize the real cost of these purchases.
Create an Emergency Fund
Every household should save three to six months of income in a savings account. The discipline required to create this fund will be used to save for long-term goals, such as college educations and comfortable retirement living. Small amounts will add up quickly, which is very encouraging to the entire household.
Cover unexpected bills
A major car repair bill or an unexpected medical bill is paid from the funds that have been saved in the emergency fund. Instead of incurring debt, the money manager verifies every line item on the bill and writes a check for the entire amount.
Never pay interest
Debt payments are made up of a significant interest component and a small principle payment. Debt elimination requires a sustained effort over many years. The household that maintains an emergency fund will never need to make debt payments.
Efforts to create an emergency fund will affect the mindset of the money manager and everyone else in the family. Preparations in other areas of life will reduce expenses and allow the monthly income to be utilized more effectively.
Careful consideration for the use of every dollar in the monthly household income is essential for the financial health of the family. Early decisions about the monetary priorities will avoid conflict. Family members will know that the larger goals are driving each spending and saving decision. Healthy financial habits will sustain a family through the lean times and optimize savings opportunities when extra money is available. Children will learn solid financial management skills before needing to manage money after leaving home. Every member of the family will reap the benefits of careful money management practices.