Do you ever wish you had someone that would just follow you around and slap your credit card out of your hand whenever you were about to make a bad financial decision?
The “good angel, bad angel” on the shoulder portrayed in movies would sure come in handy when you’re about to make potentially life-ruining purchases or decisions. And believe me, if I could send you a pair of budget-conscious fairies to help you change your habits, I would.
But let me fill you in on a little secret: you don’t need them.
With a little bit of research and a lot of self-discipline, you will begin to see what seemingly harmless or inconsequential decisions can do to your bank account and credit score.
For starters, here are five common characteristics of people who find themselves in a perpetual cycle of debt.
Having No Emergency Savings
When unexpected events occur, such as speeding tickets, car accidents, broken bones or illnesses, job layoffs, home repairs, unexpected travel for a family emergency, etc, do you have a plan in place to cover the financial burden?
Having an emergency fund set aside just to guard against these unexpected circumstances from destroying you financially is absolutely crucial to avoid debt or even bankruptcy. Because when, not if, something happens, borrowing funds from your regular budget means less money for bills, food, gas etc. Which usually means you start throwing your purchases on the credit card. This leads to a downward spiral of playing catch-up that is hard to break.
All of this can be prevented by starting a simple savings account that goes untouched unless absolutely necessary. If you don’t have much to start with, that’s okay! Set a goal to add $5, $10, $20 per week or month to it, and over time it will become a substantial amount that will give you peace of mind.
Relying On Credit
People in debt tend to live paycheck-to-paycheck, and with a heavy reliance on their credit cards and lines of credit. Spending more than you make is a nasty habit with lasting consequences, usually in the form of hefty interest payments, late payments, and dings to your credit score.
Those who are in the habit of reaching for the plastic should consider carrying an allotted amount of cash with them that they can use in place of their credit card, and should also consider getting rid of their overdraft protection. Those cards don’t seem like money to us because we don’t see the amount leave our possession, so using cash and keeping a running or mental balance of our funds can help you live within your means and be mindful of your spending habits.
Failing To Budget
The old adage, “if you fail to plan, you plan to fail” rings true for your finances. If you don’t have an idea of what you spend each month in relation to what you make, you’re setting yourself up for disaster. It won’t take you long to sit down and list out all of your bills, their amounts and their due dates. A simple search through your online bank account can give you an idea of how much you spend on shopping, eating out, gas, etc.
Once you have an idea of how much you’re used to spending, set some goals to ensure that it is well within your income and to save the rest for your emergency fund or large purchases.
Ignoring Your Credit Report
You are entitled to a free copy of your credit report from each of the three credit reporting agencies once per year. Look it up, and learn the lingo. There may be some terms you don’t quite understand, like “utilization ratio” and “revolving account.” You can find many helpful resources online to help you quickly figure out what it all means. Look for your overall score, and also any negative items. It’s also important to learn how to identify any potentially incorrect information that you could dispute to improve your score.
Last but certainly not least, a very common habit among those in perpetual debt is retail therapy. Shopping as a distraction from your problems, shopping to relieve boredom, shopping for exercise – these are all red flags that your spending may be out of control. When you go shopping without a plan or purpose, you are destined to spend impulsively, wreaking havoc on your budget and, over time, your credit score.
Instead of defaulting to shopping, focus on ways to deal with your problems directly so that they are managed appropriately. Have a plan of action so that the next time you feel that stress or boredom coming on, you can go directly into an activity that won’t drain your bank account or rack up debt on your credit cards.
Like all good things in life, financial management skills take time and practice to perfect, and with some trial-and-error and a lot of self-discipline, you will soon see how living debt-free really is a new kind of freedom you never experienced before.