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It’s so easy to fall deeply into the abyss of debt.
Your friends are lining up to buy that new $1,000 iPhone X. You figure you need to upgrade, too. The monthly payments won’t be too much.
Or your daughter will want that hot $60 toy for Christmas. But she outgrew her $139 winter coat from last year. You figure Santa can put a smile on her face Christmas morning while keeping her warm all winter if you just stretch a little and charge both items. The monthly payments won’t be too much.
However, life’s expenses won’t stop after the holidays. You’ll still have to pay your rent or mortgage plus utilities, groceries, insurance premiums, gasoline, cable and other bills. And what about the next new thing? Or the unexpected dental bill or, God forbid, a hospital stay?
You’re about to fall into the debt trap.
To help you sidestep it before it starts spiraling out of control, we’ve got these seven tips for you.
1. Know where you stand
First, a math test: Compute your household’s debt-to-income ratio. That is, divide your total monthly debt payments by your gross monthly income. This will tell 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 and $300 toward credit card debt. Your monthly debt payments total $2,000. So you divide $2,000 by $6,000. Final answer: 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, the Consumer Financial Protection Bureau warns. Also, lenders generally won’t issue qualified mortgages to people with debt-to-income ratios of more than 43 percent.
2. Don’t try to keep up with the Joneses
If the family next door gets a shiny new car every two years, you just saw a 65-inch LED TV delivered there, and the mom and daughter go out for mani-pedis weekly, they may be fine — but they may be living beyond their means.
You don’t have to copy them. Evaluate what you really need, analysts say.
As Money Talks News founder Stacy Johnson has put it, you can either look rich or be rich — you probably won’t live long enough to accomplish both. He explains in “Want to Be Rich? Here’s All the Advice You’ll Ever Need, in 10 Simple Sentences”:
“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
That $899 gold iPad Pro might not bust your charge card limit, but that’s not the test to see if you can afford it.
When you pay with credit, you’re really borrowing money that has to be paid back. So if you don’t have $899 in the bank to pay off that credit card bill by the end of the month, your tablet will end up costing you a lot more.
If you charge $899 on a card with a 15 percent APR, and you make minimum monthly payments of $20, it will take you more than five years to pay off your iPad, according to online calculators. In that time, you will pay more than $400 in interest charges — meaning you will have paid more than $1,300 for an $899 device.
4. Track your spending
Track your spending with one of the various free apps designed for the task. Seeing where your money really goes will help 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.