It’s so easy to fall deeply into the abyss of debt. There are hot new toys to buy for your kids, and fancy new electronics to purchase for you and your spouse.
Then, there are the day-to-day expenses: Your rent or mortgage, groceries, insurance premiums, gasoline, cable and other bills.
But debt is not inevitable. To help you sidestep debt before it starts spiraling out of control, we’ve got these seven tips.
1. Know where you stand
Compute your household’s debt-to-income ratio by dividing total monthly debt payments by gross monthly income. This tells you what share of your income goes to debt payments each month. You want a low score.
Say your gross monthly income is $6,000, and each month you pay:
- $1,500 for your mortgage
- $200 for an auto loan
- $300 toward credit card debt
Your monthly debt payments total $2,000. Divide $2,000 by $6,000, and you’ll discover that one-third of your gross income goes to debt payments.
The higher your debt-to-income ratio, the more likely you are to run into trouble making monthly payments.
2. Don’t try to keep up with the Joneses
The family next door gets a shiny new car every two years, and you just saw a 65-inch LED TV delivered there. Lately, the mom and daughter rave about their weekly mani-pedis.
They might be financially fine — or perhaps they are living beyond their means.
You don’t have to follow their footsteps. As Money Talks News founder Stacy Johnson has written, you can either look rich or be rich — you probably won’t live long enough to accomplish both. He explains in “The 10 Golden Rules of Becoming a Millionaire“:
“Diverting your investable cash into things like cars, clothing, vacations and houses you can’t afford will make you look rich now, but prevent you from actually becoming rich later.”
3. ‘Charge it’ less
When you pay with credit, you’re really borrowing money that has to be paid back. Let’s say you paid $899 for a tablet. If you don’t have the money in the bank to pay off that credit card bill by the end of the month, your purchase will end up costing you a lot more.
Charge $899 on a card with a 15 percent APR and a monthly minimum monthly payment of $20, and it will take you more than five years to pay for that tablet.
Here’s the toughest part to swallow: In that time, you will pay more than $400 in interest charges — meaning you have paid more than $1,300 for an $899 device.
4. Track your spending
Track your spending with free software designed for the task. Seeing where your money goes helps you spot unnecessary purchases and adjust your spending.
As we explain in “5 Reasons You’ll Never Get Out of Debt”:
“If you don’t know where your money is going or even how much you make monthly, you’ll never get out of debt. Every time you open your bank account, it will be a crapshoot whether there is money there.”
Keeping close tabs on bank balances also helps you avoid overdraft charges.
Looking for the right software to help you track your spending? Several folks at Money Talks News swear by You Need a Budget, also known as YNAB.