How to Avoid Going into Debt

Through reflection and analysis, there are ways to avoid the debt trap.

Greetings, Talking About Money Community, I hope you are well. 😊

In this post I want to talk about not getting out of debt, but rather about avoiding debt in the first place (as much as you can as a person living in the United States).  Of course, there are assets that you must leverage with debt in order to acquire in the first place, such as a home.  Virtually no one in the United States is able to buy a home without a mortgage.  And to those who can, wow.

But are there ways to avoid debt – credit cards, but also high-priced debt on assets like a car or a college education?  I’m curious about what it takes to avoid debt, so let’s consider what might work for you, and for those you work with.  Let’s dive in.

Know where borrowing fits in with your values.

How would you describe your core values? If you could picture your ideal world, what would it look like?

Your core values might be what gets you out of bed in the morning, like generosity, self-respect, or family.  Living in a way that is in conflict with your core values might keep you up at night, adding to your overall stress.  Reflect on what your values are and how they play out against your personal finances.  Then think about what kind (and amount) of borrowing is most comfortable for you.  If you are about to make a big borrowing decision and you are feeling uneasy about it, that is your body telling you something.  Listen to it.

Develop a positive relationship with yourself as a person who generates income.

Is the job that you do something that fills you up (intellectually, creatively, spiritually), or is it simply a means to put food on the table? 

Regardless of how satisfying your work life is, it is important to reflect on the role that work plays in your life.  The ability to generate income is not only how you spend the hours of your day, but also a key factor in reaching your financial goals.  How you feel about your identity as a person who generates income will bleed over into how you feel when your time is your own, and you deserve to feel good in all aspects of your life.  Figure out where work fits into your sense of identity, develop a plan to always have at least some money coming in, and make peace with it.

Track your income and spending.

What is your income and spending in a typical month? In a typical year?

Knowing what is coming in and going out of your bank account in a typical month gives you valuable data.  Are you making enough income to cover your spending, or not enough?  Is your income stable, or does it ebb and flow through the year?  If you do have extra money coming in, are you allocating it towards building an emergency fund and your retirement savings?  Knowledge is power, and being intimately aware of your income and spending can enhance your ability to attain your short-, medium-, and long-term goals.

Pay your bills on time.

When are your bills due, and do you pay them on time?

Creating a plan to ensure that that you always make on-time payments reaps a lot of rewards.  You will have peace of mind that they are taken care of.  You will save by not having to pay additional interest and late charges.  You will maintain your credit history in a way that will make any necessary borrowing cheaper in the future.  There are no real downsides to making on-time payments. 

Maintain an emergency fund.

Are you someone who could pay for an unanticipated expense of $1,000 without borrowing?

Emergency funds are important for everyone to have, not only in the case that you are unable to work for a short period of time, but also to cover an unexpected purchase (like when your car breaks down). Building and maintaining an emergency fund is a little insurance policy that you create for yourself, so that you can avoid borrowing and the associated interest payments that grow over time.

Automate your savings.

Do you have a system to “pay yourself first” each pay period or each month?

Making your savings grow should not be tremendously difficult, especially after you have started tracking your income and expenses.  And the “set it and forget it” approach allows your savings to grow without you having to make a conscious decision to save each month.  Utilize either direct deposit from your paycheck or auto transfer from your checking account to move funds into one or more savings accounts, where different savings “buckets” can be labeled for home maintenance, a new car, or even a vacation.

Shop for big ticket items carefully.

Do you take the time to comparison shop for big ticket items like cars and college?

Intentional comparison shopping can save you lots of money in the long run, both in terms of the ticket price of the asset that you are buying, and through interest payments if you do need to borrow to close a gap.  Before walking into a car dealership, research online the type of car that you need so that you are not swayed by the siren song of lots of bells and whistles that you do not need.  The similar is true for college financing. Figure out what you need out of a college education, and then work backward to find the school that can fit your needs in a way that you can afford.  While car loans and student loans are a go-to for most people, finding a cheaper car that meets your needs, or attending a college that awards grants and merit scholarships (that don’t need to be paid back) make your dollars stretch further.

Only borrow what you need.

Do you tend to borrow what the lender will allow, or do you take the reins and only borrow what you absolutely need?

If you have reached this point in the article, I hope that you have spent a few moments reflecting on your values, your identity as a working person, and your roles and responsibilities as the CFO of your household.  Now that you have come this far, you should have a clearer vision of how much borrowing is right for you.    If you get to the point when you need to purchase something quite large, such a vehicle or a college education, if you have been saving on a regular basis, you will have less of a gap to fill through borrowing.

What do you say?

What is your perspective in taking a big-picture holistic approach to borrowing?

What more needs to be considered to ensure that you do not get into debt over your head?

What – if any – is the benefit of borrowing first, and thinking about it later?

Share your thoughts with this insightful and supportive (and did I mention good-looking?) community, either in the Comments below or on LinkedIn.  Thanks, stay safe, and be well.