Did you know the average U.S. household with credit card debt has a balance of over $16,000. For those of you number nerds like me, I did the math. Assuming you are one of those households that carry credit card debt of $16,000 your interest alone could be upwards of $3,000 per year, assuming 18.76% APR (the average for most credit cards). Household debt has increased by 11% in the last year. But there is hope at the end of the tunnel, there are habits you can adopt now, to help you get out of debt and stay out of debt.
Now I am not a finance guru but I have been able to live relatively debt free for most of my adult life. With the exception of our mortgage, and my newly purchased car my husband don’t have any debt to our name. We have a plan to pay our credit cards off by the end of each month, and in the event we can’t, we know it is short-term, and we put a plan in place to pay it off before we ever spend the money.
1. Use Cash Whenever Possible
I’m sure you have heard this before. If you are really struggling to live within your means this is a very simple way of doing it. Take cash out of the bank and only use cash to pay for expenses. If you are down to your last 20-dollar bill, you are not going to spend it on a new outfit when you know you still have to buy groceries.
Using only cash forces you to not over spend, and helps remind you the value of a dollar and prioritize your purchases. It is so easy to pay for things with plastic. With credit cards you lose track of what you spend, and when you get the bill each month no one is ever surprised with how low it is.
2. Live Within Your Means
Whether you make $20k per year of $250k the principle is still the same. You know how much you make, and you need to focus to live within your means. When I was in college, working part time and paying tuition, I ate a lot of macaroni and cheese and peanut butter sandwiches. Why? Because they were cheap. A cheeseburger was a luxury. Dinners out were special occasions and happened few and far between. I drove a crappy car, and hardly drove it because gas and parking was expensive and walking was free. I stayed out of debt in college, because I knew what I could and couldn’t spend.
3. Set a Budget and Diligently Follow It
You should be aware of your money at all time. Knowing what comes in each month, and what is going out will help you determine where you are wasting money and how to cut expenses. Need a template to get started, I adopted this one from a Free version you can get through Microsoft Excel. It includes a monthly budget and an annual summary. I filled in a few months just so you can see it working
4. Set Up an Emergency Savings
You can follow all of the above habits, but emergencies happen. Your car breaks down and you need to get to work, your furnace goes out in the middle of winter. These things come up and can get you in trouble if you haven’t planned for it. Start small and build up a savings account should something unexpected pop up. If you have a few hundred dollars stashed away for those unavoidable emergencies, they wont be such a burden. Instead of putting them on your credit card, and paying interest for the next year, you can pay it off much quicker or pay it off entirely in cash up front.
5. Make Saving Automatic
This goes along with the previous habit, but make adding to your savings account an automatic. Most companies allow for direct deposit into multiple bank accounts. A portion of every pay check that I get goes into my savings account. It happens without me even knowing and I have learned how to live off the amount that goes into my checking account. Without me even knowing my savings has accrued to cover an emergency fund and adding to my long term savings plans like 401k and retirement accounts. Even if you can only afford to move $5 into savings per paycheck, start it now. In a year, assuming you get paid every other week, you will have saved up $260, double that if you move $10 per pay check. It is a small amount but it can quickly add up.
The stats in this article come from 2016 American Household Credit Card Debt Study by NerdWallet.