How to Avoid Debt

New clothes, new shoes, new MP3 player… ahh, the life. It is much more fun spending money than it is saving money. And banks make it so easy for you to spend beyond your means with the infinite credit card offers stuffed in your mailbox each month. With over one billion (yes, billion) cards in circulation, it is no wonder that the typical American carries a $5,800 balance on his or her credit cards each month, paying 18.3% in interest. That translates into paying $929.70 a year in interest payments. So you pay $1,000 for absolutely nothing. Nothing!

In order to avoid debt and start saving, you should live BELOW your means. It may sound funny, but in order to remain financially fit, you must not spend every dime you make. The golden rule says to set aside 10% of your total income (i.e. what you earn) as savings. This will not only allow you to avoid debt, but will help you create wealth. Plus, you never know when you may need this extra cash for unexpected surprises like new tires, an unexpected large air conditioning bill, etc.

The first step to stop spending above your means is to develop a budget. A budget takes some time to set up, but once it is done, the results are well worth it. A budget will show you exactly where your money is going and how much you are spending. You will probably be surprised by the outcome. Once you discover where your cash is going, you can figure out the areas that need improvement. It is important to keep your budget simple so that you can stick to it.

First, write down everything you spend for one month, and that means everything - gum, soda, movie tickets, and everything in between. Once you have figured out how much you typically spend in a month, it is time to plan your annual budget. With your actual expenses as a guideline, estimate how much you spend on each item for an entire year. You will probably have an expense sheet with the following expenses: tuition, books, supplies, rent, food, clothes, transportation, vacation, credit card payments, utilities, toiletries, entertainment incidentals, and miscellaneous items. Add up all your expenses for your grand total of annual expenses.

At this point you should determine how much income you will make for the year. If you are in college or high school, you may have several sources of cash flow. For example, you may receive money from financial aid, student loans, your parents, or your paycheck. Add up all the money you expect to receive this year for your total annual income.

Now subtract your annual expenses from your annual income to see the net difference. Hopefully this is a positive number, meaning you have excess cash flow, as opposed to a deficit (i.e. debt). If your annual income is larger than annual expenses, you have cash flow. Very good! If your annual income is smaller than your annual expenses, than you will owe money. Bad! If your expenses are more than your income, you have two options: one, you can increase your income; or two, you can cut down on your expenses. It is your choice to figure out which option will work best for you.

If you cannot increase your income, then you must cut expenses. There are several things you can do to cut back. First, cut down on variable expenses such as clothing, entertainment, and eating out. Eat at home a couple of times instead of eating out. Forego buying the latest CD and download it from Napster (well… anyway!). Second, be careful when using the credit card. It is easy to whip out the plastic and not realize how much you are spending. Keep all your receipts and write down every time you use your credit card(s) so that you will not be surprised at the end of the month when you get your bill. Believe me, keeping track of credit card purchases make for no rude surprises when you open that bill up at the end of the month. You may be asking, why even have a credit card if it easy to misuse? Well, it is important to have a credit card in order to establish credit. Third, avoid impulse purchases and only buy those things that you really need. Fourth, when you are going out, plan how much you want to spend and stick to it.

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