The 20s can be one of the best decades of your life. You’ve finished school and you’re on your own. If you have a decent job you have more money than ever before. Want to buy a new laptop? Then go for it – the decision is yours and yours alone. Ditto that car you’ve been eying.
But as that wise, old saying goes, “with great freedom comes great responsibility”. And you now also have a new responsibility – to avoid getting into debt that could plague you for years to come. You’ve undoubtedly already learned the importance of paying your rent, your utility bills, buying groceries and taking care of some of those other expenses of life. But if you’re typical you’re being bombarded by offers for credit cards, department store specific cards and personal loans.
Unfortunately, most of these come with interest rates that can only be described as usurious. One of the biggest problems with these offers is that they’re often sold as a safety net – something that would be there to help in the event of an emergency. But if you’re not careful you could end up maxing out those cards and stuck with high-interest debts that will haunt you all the way through your 30s.
Fortunately, there are things you can do to prevent this from happening and here are eight tips that can help you avoid getting stuck in debt.
1. First and foremost, avoid credit cards like the plague
There are some good reasons to have a credit card. For example, it’s true that it’s not a bad idea to have a credit card available in case of an emergency. Also, if you use a credit card sensibly this will help you improve your credit rating. Unfortunately, it can be very tempting to use that card or cards to buy things you can’t really afford. The unstated goal of every credit card company is to get you into debt while you’re young and then bleed you like a leech with minimum payments and compound interest. So when you get those tempting credit card offers just do what that old anti-drug commercial advised and “just say no.”
2. Underestimate your income and overestimate your spending
You may have come to grips with the idea of budgeting for your food, bills, rent and other expenses. While that’s all well and good it’s important to understand when you create a budget that both your spending and your income can fluctuate greatly. This means when you’re creating your budget it’s a good idea to overestimate your spending and underestimate your income. Do this and you’ll dramatically reduce the possibility of having to borrow money to help you through a month when you’re sick and can’t work or winter hits and your heating bill goes up drastically.
3. Be prepared for sudden expenses
Whether you want to believe this or not something will go wrong. Your car will need a major repair, your dog will get sick or something else will break. When you’re creating your budget it’s wise to set aside at least 15% of your earnings just as a buffer against those unexpected expenses you can expect to get hit with. According to a study done by Bankrate, 7% of Millennials intend to use their credit cards in times of emergencies. This is actually a bad idea – it is better to use cash rather than a card especially in an emotional time.
4. Don’t think you’ll be able to afford luxuries all of the time
Some things in life are permanent and others are transient. Buying high-priced luxury items might feel good for a while but generally don’t improve your quality of life over the long term. What’s better is to spend your money on doing rather than buying. Instead of buying a new car why not spend a few months traveling through Europe. You’ll either need or want to replace that car in just a few years but your memories of Paris and Rome will last the rest of your life.
5. Have an allowance and stick to it
The best way to control your spending is have one account where you deposit your wages and a separate account for your spending. Then arrange automatic transfers from your earnings account into your spending or allowance account, monthly, weekly or even daily. That should help you keep your stick to your “allowance”.
Our society seems to be built around the idea of instant gratification. According to an article published on PsychologyToday.com, the digital age that we are in makes waiting irrelevant. That means our minds have a hard time getting around the idea of waiting to get what we want. For that matter, all the credit schemes are designed to encourage us to not wait. You can buy almost anything on credit, which generally means making small monthly payments for years on end at huge interest rates. That might seem manageable at the time but if you keep adding one small payment on top of another your debt will begin to grow exponentially. You will soon find that you have such a small amount of disposable income you can’t afford to buy gas for the car you’re still trying to pay off. If there’s something you really want, whether it’s a new car or new living room furniture, create a savings account specifically for it and deposit a set amount of money into it every month. You might be surprised at how quickly you’ll have enough money to pay cash for the stuff you really want.
7. Pay off your debts with your savings
As noted above, the more debt you have the less disposable income you have. If you have $1000 in debt accruing interest at an APR of 18% or higher and $1000 in a savings account that pays 3% APR – this is a no-brainer. Use the $1000 in your savings account to get rid of that $1000 in debt. You’ll be able to breathe easier knowing you’ve eliminated that debt and will now have more disposable income some of which you could use to replenish your savings.
8. Understand that interest-free credit is not free money
There are numerous credit cards available now that offer interest-free periods from 6 to 18 months. But if you sign up for one of these cards don’t make the mistake of thinking that this is free cash. These interest-free offers are meant to encourage reckless spending so that when that introductory period ends you’ll have a huge amount of new debt at an interest rate that could be as high as 19%.
The fact is that most of us will have to deal with debt throughout our lives. Whether it’s buying a new car or a new house most of us will just never have enough cash available to pay for them. Now, when you’re still in your 20s, do your best to avoid debt. Try instead to learn to enjoy the simpler things in life and not complicate these years with financial worries. Use some impulse control, do some calculating and you’ll have a fun, debt-free and fulfilling decade.