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10 Ways To Avoid Getting Into Debt In Your 20’s

10 Ways To Avoid Getting Into Debt In Your 20’s

Your late teens and early 20’s are times in your life when many people are making transitions from dependency to independence. With that, comes financial independence. Maybe you’re in college, or have just moved out of the house you grew up in.

Regardless, learning to balance rent, bills, groceries and other expenses can come as quite a shock, and many young adults end up accruing large debts that can plague them for years on end.

Many young adults are targeted by usurious credit lenders, offering high interest credit facilities such as credit cards, department store-specific cards and loans. These are often sold to young adults as a safety net for emergencies, but the reality is that frequently, these credit facilities are maxed out very quickly, saddling the borrower with high-interest debts that can take years to pay off.

Here are some simple, no nonsense pieces of advice for any young adult who wants to live a debt-free, stress-free life during their best years.

1. Avoid credit cards

If we could give one piece of financial advice to anybody in their 20’s, it would be this. You may think that it’s a good idea to have a credit card for emergencies, or to use one to improve your credit rating, and although these are all well and good, the reality is that credit cards are rarely used for these purposes, and the temptation to spend on them is always there.

Credit card companies aim to get people into debt while they’re young, and keep them their by bleeding them very slowly (through minimum payments and compound interest). Credit lenders are masters of making money, and they will play on your fear of being broke to mislead you into getting a credit card.

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The only real way to beat the credit card companies is not to get a credit card.

2. Overestimate your outgoings, underestimate your income

It always makes sense to have a budget for rent, bills, food and other expenses, but one thing that people seem to neglect to factor into their budget is that income and outgoings can fluctuate wildly. For this reason, it’s always a good idea to draw up a budget using your maximum estimated outgoings, and your minimum estimated income.

Remember that if you are sick one month, your income will decrease, and during the winter, your heating bills will increase. Using this method should help to ensure that there are no nasty surprises at the end of the month when the figures don’t match up.

3. Be prepared for sudden expenses

Never make the mistake of assuming that things won’t go wrong. Things will break, prices will rise and fines will be charged. When drawing up a budget, I find it’s wise to set aside 15% of your income just as a buffer against sudden expenses.

Your car might breakdown, your boiler might go on the fritz, your dog might get sick. Be prepared for this.

4. Accept that you may not be able to afford luxuries all the time

Luxury items bring fleeting and temporary happiness, which dissipate as quickly as they come. Expensive clothes, technology and furniture actually do very little (if anything) to improve your life and general satisfaction levels.

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That’s why it’s better to invest in doing things rather than having things. You don’t have to live a bare-essentials lifestyle, but cutting back on unnecessary luxuries during your younger years will not only save you a mountain of debt that you’ll have to pay off, but will also allow you to live a simpler, more care-free existence.

In the words of Roger J Corless, “Happiness is not something I have, it is something I myself want to be. Trying to be happy by accumulating possessions is like trying to satisfy hunger by taping sandwiches all over my body.”

5. Give yourself an allowance and stick to it

Sticking to a budget is often easier said than done. We often find the easiest way to regulate spending is to have an account which your wages are paid into, and a separate account for spending, and then arrange for a set amount to be paid into the spending account (either monthly, weekly or even daily), to ensure that you can keep track of your finances without overspending.

6. Save for things you really want

One of the side effects of the western fast-food culture of instant gratification, is that we struggle to get our heads around the concept of waiting to get what we want. In fact, we have all sort of credit schemes set up to actively encourage us not to wait.

Almost anything these days can be bought on credit. This usually involves making small, monthly payments for years on end at a massively inflated interest rate. It all seems very manageable, but one small payment added to another small payment, and another and another all begins to add up.

Before long, your disposable income has shrunk down to such a small amount that you can barely afford to buy gas for that over-sized car you’re still paying off. And what happens if you lose your job and can’t afford to make the repayments? Well, then you have to hand it all back.

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7. Learn to enjoy the little things

Some of the best things in life cost little to nothing. You can’t put a price on good company, laughter or fun. Anyone who claims that you can’t have fun without spending money probably isn’t much fun to begin with. Some of the best activities in your life life can absolutely be cheap or free. Trade TV and computer games for socializing, and you’ll find life becomes richer (and you, too!).

8. Use savings to pay off debts

This is one of the most obvious but commonly overlooked ways to reduce your debt level. If you have $1,000 of debt, accruing interest at 18% APR (if you were so lucky as to have it so low), and $1,000 in savings, accruing interest at 3% APR (if you were so lucky as to have it so high), then you would immediately save yourself money by paying off your debts with your savings.

There is pretty much no scenario in which you will be borrowing money at a lower rate than the interest on a savings account.

9. Pay debts on time

If you have debts to pay, make sure you have the correct direct debits/standing orders and available money to pay them on time. Often the charges for missing payments can cause your initial debt to soar, which can lead to spiraling debts and financial chaos. Always ensure you know when money is due to be paid, and ensure that you have the funds set aside to do so.

10. Interest-free credit is not free money

Just because something says it is interest free for six months, don’t assume that this means you have just been given a fistful of free cash. These offers are setup to deliberately encourage reckless spending, and as soon as the interest-free period is over, you’re saddled with a high interest rate on an insurmountable heap of debt, which you probably don’t have much to show for.

Now, we know what you’re thinking; you could just put all of the money in a savings account, wait until the six months is up, and then pay it all off, keeping all of the interest accrued for yourself.

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Great idea… In theory. The reality is that less than 1% of people who attempt this actually manage it. Your creditors know this. They are not stupid, they know how to get you into debt and keep you there for as long as possible. Don’t be caught out.

Hopefully, this has given you some insight into how to avoid debt. Debt is a totally unnecessary stress that the majority of us deal with throughout our lives. Your younger years should be spent enjoying the simpler things in life, not over-complicating it with financial worries.

With a little calculation, and a lot of impulse control, you can have a fun, free and fulfilling life. Without Debt.

Featured photo credit: Flickr via farm8.staticflickr.com

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JC Axe

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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