If you feel like you are drowning in debt and it seems like you are not improving, you might want to take a look at your spending habits. Most of the time, it is not really your income that will dictate if you are a financial success or not. It is how you choose to spend the money that you earn. If you never learn the right way to spend your finances, it will not matter if you earn a six-figure income or much lower than that. You will always find yourself drowning in debt.
But if you think about it, is it possible to not be in debt in this consumerist society that we live in? If you look at consumer reports, it is possible. There are those who say that they are debt free. Unfortunately, the consumers who say they do not have debt have dropped from 27% to 23% after a year. However, it still proves that it is possible to thrive in our society without using debt.
Does that mean you completely eliminate debt? The answer to that is no. You still need a high credit score to fully enjoy certain financial opportunities. And to have that, you need to use debt. You just have to make sure you do not abuse it to the point where you are drowning in debt. You have to use debt with a clear idea of how you will pay it back.
The control that you have when using debt will be dictated by your spending habits. After all, it is your spending behavior that fuels how you use credit. If you cannot tame the way you spend your money, you will always find yourself with a huge amount of debt.
5 spending habits that keep you stuck in debt
So how can you keep your spending habits from making you drown in debt? You might want to check if you are guilty of the following habits.
Spending more than your net income
Overspending is never a good thing. Unfortunately, this is common among Americans. According to a study, almost half of consumers admit that their expenses are either equal to or greater than what they are earning. If you only consider those between the ages of 18 to 25, the percentage is even higher – more than the majority. Obviously, when you spend more than what you earn, you are relying on debt to pay for whatever your income cannot cover. That debt has to be added to what you have to pay the next month. In effect, your expenses will continue to rise and your income will stay the same. Unless you can end this cycle, you will end up drowning in debt and probably never recover from it.
One of the most effective ways of getting out of debt is spending a lot less than what you are earning. If you have to take drastic measures like changing your lifestyle, then you need to make the sacrifice. You cannot go on with living beyond your means because that will only end in financial disaster. Move to a smaller house or sell your second car. If you are used to eating out for lunch every day, start bringing a brown bag to work. Make a list of all your expenses and see if there are things that you can get rid of. Whatever you remove should be used to pay off your debt.
Thinking your credit card is an extension of your wallet
Another spending habit that you need to remove is your perception that your card is your money. Some people end up maxing their credit card because it gives them a stronger purchasing power. That is a misconception. While it gives you access to more cash, you are not using your own money. Every time you use it, you are using the money of the creditor. Not only that, you are paying more than what you really purchased because you have to add the interest.
This is a mindset that you need to change because it will lead to irresponsible spending habits. When you use debt, you are actually using the money that your future self should have been spending. You may feel like your present self is doing great, but that is at the expense of your future.
Failing to plan credit purchases
Being responsible with your finances means you have to plan your credit purchases. Failing to do that would make it very easy for you to abuse the use of credit. You will only find out about the total expense when the billing comes and by then, it would have been too late. But if you include it in your budget plan, you will know your limit. Not only that, you will have the funds ready to pay off the balance as soon as the billing statement arrives. When you can pay your credit card balance in full, you will not be affected by the high-interest rate.
For instance, you put a $200 budget for credit card purchases. That is your limit for the month. You can buy anything that you want that is worth this amount. When your billing statement comes, you can use the $200 fund from your budget plan to pay your balance in full. Since you paid it within the grace period, you are just paying that amount. There will be no finance charge will be added to it.
Relying on debt as the only debt solution
Let us get one thing clear. It is okay to use debt as a debt solution. There are many benefits when you use debt consolidation loans, home equity loans, etc. However, you need to know that there are specific financial situations when it is a good idea and there are instances when it will only make things worse. You have to know if this is the right debt solution because if not, you will just be adding to your balance. Some people use their credit cards extensively because they know they can borrow a debt consolidation loan with a lower interest rate. They can use the latter to consolidate their high-interest rate cards. But once the cards are paid off, they start using the cards once more. They end up having two types of debts to pay off. This will keep you in a debt cycle that can quickly escalate and destroy your finances.
If you want to use debt as a debt solution, make sure you know what you are doing. Not only that, you have to be disciplined enough to pay off the debt that you used. Remember that if the loan you will get will not help you save money, then there is no point in shifting your debts around.
Using credit cards even when you have cash
Finally, you should try to use cash when you have it. Sometimes, when you use cash, you will be more hesitant to purchase something. Something in your head makes it more painful to part with actual money as compared to using credit to pay for purchases.
But there is also another way of looking at this. If you want to use credit for the rewards but you have cash, it is okay to use the former. Just make sure that you will put aside the cash and use it to pay off the debt when the billing statement comes. That way, your debt situation does not have to get worse.
Responsible spending habits can curb debt
According to reports, more than 8 out of 10 Americans know what it feels like to be broke. Most of the time, the reason why they ended up being broke is that of the way they spent their money. They chose to spend it on unnecessary things or too much of it on food. For the latter, it is probably due to frequent eating out.
As you can see, your spending habits have a huge effect on your ability to improve your finances. That includes curbing debt or making it worse. If you want to keep yourself from going broke because you are drowning in debt, you need to seriously look at how you spend your money.
When you are a smart spender, it will not matter if you earn the minimum wage or a six-figure income. You will learn how to manage your finances well. You will naturally spend lower than your income. The extra money that you will get from your income can be used to give your savings a boost or invest in something that will grow your personal finances.