Debt is the cancer of today’s society. Many people buy things they don’t really need for the money they don’t have. As a result they end up in complete debt, when all their earnings go to pay back existing debt, and they end up borrowing more money.
image source: time.com
Sure, you can use loans and credit the smart way, but you need to be in total control of the situation in order to benefit from borrowing money. A couple of tips I shaped fro myself:
1. If you are young, start a savings account.
Put 10% of everything you earn to into your savings and never break that rule. Even if the money seems tight – still put one tenth away, if the money seems coming in easily – save even more so. You will thank yourself later.
2. Do not buy stuff if you do not really need it.
It sounds obvious, but we still make purchases under the influence of everything but necessity. Of course if you got a good job in another town and don’t have a car, you need to get one, but buying a brand-new top-of the line computer just because one of the games performs choppy on your old one – that can wait.
3. Small loans contribute to big debt.
Stuff accumulates. One day you get an extra $200 from your credit card, another day you sign up for a no-money-down cellphone, and in the end you need to pay a sum equal to your rent each month.
4. Know where your money goes.
Don’t be thinking you have enough money just because “it’s enough each month”. Burning through your whole salary not only violates our point 1, but it also leaves you falsely relaxed. You need to know what you are spending on in order to save, earn more and afford more things. You don’t have to keep complicated books, start by writing down your major shopping on essentials: groceries, clothes, rent and gas. You might be surprised at how little you actually spend on that, and how much money you waste on stuff you can live without.
5. Create a budget.
This is a natural outcome of point 4. Once you know how much you’re spending on what, you can afford borrowing money. Have your typical expenditures in front of you, tell yourself “I’m gonna get this loan, and I will pay it back during the next X months by taking the necessary amount from my Y expenditures”. All your other expenditures as well as the 10% of savings should stay unaffected! Then and only then loans are acceptable.
[...] we should all watch out for. So follow these simple rules: save money, do your best to stay out of debt, pay with money you have and only for things you really need, and try to pay 20% of the mortgage [...]