Our society is not keen on encouraging us to avoid debt. In fact, the financial industry have invented a lot of products that will make debt very easy to do. Take for instance credit cards. This purchasing tool made borrowing money easy. Not only that, it made being in debt the norm. There was a time when buying through credit cards made you feel rich.
We all know that this is one of the most popular debt traps designed for consumers. You may feel rich using your credit cards because it gave you unlimited buying power. But what you do not realize is that you are not actually buying with your own money. You are borrowing from your creditor. If you fail to pay the creditor in time, you will pay them with interest. Now isn’t that a waste of money?
The truth is, our society seems unable to avoid debt. According to NewYorkFed.org, the household debt in America has grown again. The report said that it actually stayed flat because the growth is only 0.2%. Seems like a small amount – until you realize that the 0.2% is actually $24 billion. Isn’t that astounding? That is what you get when the overall credit is currently at $11.85 trillion.
This is a really scary scenario. How have our society come to this? How can we look at a $24 billion debt growth and say that consumer debt stayed flat? If you think that you will get support in your pursuit of a debt free life, you are sadly mistaken. The importance given to credit scores can prove this. Society will not tell you to give up debt. You need to be in debt in order to get a good credit score.
Living in a society that puts importance in credit means feeling awkward about saying no to situations that will put you in debt. It means feeling ashamed that you have to say no because you want to avoid debt.
Well society might feel differently about you avoiding situations that will get you in debt. But if you think that it is the right thing to do, then you need you stick to what you feel is best for your finances.
2 awkward situations with friends that can put you in debt
When it comes to awkward situations that can put you in debt, we can think of two scenarios that you might get involved in. Let us discuss both of them and see how you can handle them without damaging your pride – at least, not too much.
Backing out of what turns out to be an expensive plan.
Here is the scenario. Let us assume that you and your friends plan to travel. When you are part of a group, you usually assign one person to take care of the booking details when you are travelling with. If that person is a high spender, you might end up with quite an expensive trip. If everyone agrees to the details of the plan but you know that you cannot afford it or it will be beyond your budget, what would you do? Would you back out without a second thought and say that it is a trip that is beyond your budget? Or would you go through with it and just use your credit card to pay for the trip?
According to a survey done by the American Institute of CPAs and the Ad Council, Millennials have admitted that they rely on the financial habits of their friends to set their own habits. The press release published on AICPA.org indicates that if they have friends who are high spenders, the chances are, they will be too. If they want to become savers, they need to look for people who are more inclined to save.
You know that the right thing to do is to choose the first option. It is not a good idea to go through with a trip or any other entertainment expense just because everyone else is doing it. This is even true for that weekly night outs. If you know that it is something that can ruin your budget, you need to be honest and say that you cannot afford it. Do not feel ashamed. If they are your real friends, they will understand. The next time you make plans with them, they will consider your budget.
Saying no to a call for financial help by a friend.
Now we all need to help out our friends right? We need to be there for each other. But what if that friend of yours want to borrow a huge amount of money from you? Or what if they ask you to co-sign a loan with them? What should you do?
Before you say no, you need to consider your finances first. Do you think you can afford to help them out? When it comes to lending your friends or co-signing loans for them, you need to know that you are not just putting your finances on the line. You are also endangering the relationship that you have with them.
Instead of doing what they ask, why don’t you go to the root of their problem to help them? It is not just about you trying to avoid debt. For instance, if they need a co-signer, that means their credit score is not good enough for them to be able to borrow on their own. Instead of co-signing, why not help them fix their credit score? If they need a loan, why not give them what you can and help them save up for the rest of the amount that they need? Giving them even a small amount without asking for anything in return will let them know that you are there to support but that they cannot rely on others for what they need. It is better to let them solve the problem on their own than to rely on others for help all the time.
Do not make any of these financial mistakes – regardless if they will put you in an awkward situation or not. It is still better to avoid debt than to look good in front of your friends.
Three habits that will keep you from acquiring debt
If you really want to keep yourself from being in debt, you need to follow certain habits that will keep you from unnecessary borrowing. Here are three habits that can help you out.
- Have a budget plan. This plan can help you avoid debt because it makes you aware of your financial position. When you know how much you can afford to spend each month, you can make better decisions about the transactions that you will involve yourself in. You do not have to think twice about saying no to that expensive trip that your friends are planning. Or, you will know what expenses to sacrifice in order to afford that trip. Either way, a budget will help you avoid debt.
- Budget for entertainment expenses. As you create your budget plan, it is important that you allocate an amount for entertainment purposes. According to an article published on CheatSheet.com, entertainment expenses amount to $17,000 a year. At least, this is for the whole family. But if you are single, you can still base your estimates on this amount. You want to be able to join your friends somehow. If you cannot join them all the time, you should budget to be with them at least for some of their hangouts. That way, you do not need to sacrifice your friendship and your finances at the same time.
- Build up your emergency fund. The last thing that you need to work on is your emergency fund. This is one of the effective ways that you can avoid debt. Sometimes, people fall into debt because they are unprepared for unexpected yet important expenses. In order to get out of a tight spot, they are forced to borrow money. This is the reason why you need an emergency fund. If you have one, you do not have to put yourself in a position wherein you have to borrow money in order to pay for an emergency.
Although these habits are effective, you need to be cautious of the financial habits that you are implementing in your life. Even the good money habits can sometimes have negative effects if you are not careful. Here is a video that discusses 4 good financial habits that when done in extreme, can cause negative repercussions.