Breaking the debt cycle is imperative to placing yourself in a stronger financial position. However, for many people, this is easier said than done. The fact is that there are two different tracks to follow in order to break the vicious cycle. The first is to stay out of debt in the first place. The second is to take certain steps to reduce your debt once you are already in it. Here are some ways that you can do both of these.
This primarily depends on how you spend your money. However, the right kind of habits can help ensure that you do not go into debt in the first place. Here is some of what you can do in this direction.
When you do not spend your entire monthly income, you are giving yourself some breathing room every month. When you live up to your means, you have less margin for error. There is always some unanticipated monthly expense that will push you beyond your means. When you raise your fixed expenses, it will generally make it more difficult for you.
Just because you have the ability to borrow does not mean that you need to take out credit up until the full amount. Lenders have an incentive to get you to borrow as much as you can because they make more money. They will give the maximum possible amount while still not taking on too much risk. Don’t max out here because it will still be a monthly obligation for you.
While nobody is saying that you cannot use your credits, be careful about using them as a line of credit. The costs of borrowing using credit cards are astronomical. You do not want to use this as a substitute for a loan because the interest rate will be higher and it will be more difficult to pay off completely. You will almost always stay in debt using credit cards to borrow.
It is the unanticipated car bill or medical bill that is the biggest culprit of financial distress. While these bills will always bite, they will hurt a little less if you have some money in reserve. While it is an ambitious goal and not always easy to do, try to put several months of living expenses in your emergency fund and keep it separate from your regular savings account.
If you are already in debt, there are some ways to help make your situation better. Here are some steps that you can take to reduce your debt load and give you some financial breathing room.
When you track your spending and proceed according to a plan, you get a better handle on your finances and are better able to get your expenditures under control. The key to this is learning budgeting skills. The key thing is to be able to find places and ways where you can cut back on unnecessary spending.
While it is sometimes necessary to use credit cards, you should not be in the habit of using them as a primary means of purchasing something and using them to run up debt. The high interest rates attached to these cards can keep you permanently in debt because you will struggle just to pay off the interest before you are even able to make a dent in the principal. The best thing is to use a prepaid credit card to keep you from using plastic to go into debt.
Here, you should be looking to take your higher interest loans and trade them in for lower rate financing if you are able. One of the ways to do this is to focus on paying the cards with the highest interest rates first. If you are able to take out a lower interest rate debt consolidation loan, it will help cut your monthly borrowing costs. Another way to reduce these costs is to transfer your credit card balance to a lower interest rate card.
Starting a budget on its own may help you track your spending, but there needs to be some sort of change in your spending habits in order to really break the debt cycle. Here, even incremental changes can make a big difference at the end of the month. Even cutting one seemingly small and innocuous expenditure can add up to big savings if you spend that money every single day. An example of this would be bringing your own lunch to work one additional day a week. Even saving $5 on a regular basis will mean big money down the line.
The gig economy makes it easier than ever to pick up some spare work on the side for a little extra income. You can even work as you are able without having to take on a full-fledged part-time job. Sometimes, a couple of hundred dollars is enough to make a big difference in how you live. This can mean that you are able to save a little each month in order to get ahead. This could be as easy as a simple task every now and then. This will enable to not have to cut back as much when additional income is coming into your account.
Your habits and the steps that you take can make the difference between swimming in debt and steadily placing yourself on firmer financial ground. Choose several of these steps detailed above and you will find that your financial situation will steadily improve.