Falling into debt is easy. Repaying that debt is much harder.
A recent study found that more than a third of all Americans have personal debt that’s at least 180 days past due. While occasional overspending is common, most of these people see debt as a part of their lifestyle.
Debt can pile up for a number of reasons, but it’s particularly problematic when people make major purchases without concern for the consequences. Whether it’s buying a new flat-screen TV for the big game or committing to a costly vacation rental with friends, this you-only-live-once attitude can create major problems.
Once debt piles up, the interest payments and fees alone can be enough to cripple even the most responsible borrower. It’s a tough challenge, but the incentives for battling back to “even”- or avoiding debt in the first place- are tremendous.
Debt Is a Dirty Word
Carrying too much debt in relation to your income goes beyond making it a challenge to pay bills. It can also lower your credit score.
Late or skipped payments can make matters even worse. When you become a bad credit risk, it will become more difficult and expensive for you to borrow in the future. Lenders will look for any reason to be leery of an application so you could end up paying much higher interest rates. Skip enough payments and you could end up in court or dealing with the repo men.
But, it isn’t only lenders who look at credit scores. Cable and utility companies use them to vet potential customers, too. Landlords can sometimes consult your credit score to find out how reliable you will be about paying your rent. Anyone who thinks you’re a credit risk could charge you with a higher rate or deny you services altogether.
Some employers consult credit scores before making hiring decisions. Your resume might get your foot in the door, but your credit score could torpedo your chance of earning money to repay your debt.
The main reason to avoid being a chronic debtor is that it makes you feel crummy about yourself. People often lie about how much credit card debt they have. And these aren’t little white lies. We’re talking under-reporting to the tune of about $400 million. When confronted about those lies, people admit they feel a social stigma about having a hefty credit card debt.
3 Tactics to Manage Debt During Major Purchases
Staying out of debt isn’t as much fun as getting into it, but it’s important to think ahead when making any major purchase. With proper discipline and three simple habits, just about anyone can avoid debt while enjoying the finer things in life.
1Buy only what you can afford
To determine what big purchases you can afford, create a monthly budget. First, calculate how much after-tax income you earn each month. Once you have that figure, add up the expenses you must pay on a regular basis. These are your “needs.”
Those needs should include your rent or mortgage, car loans, credit card debt and student loans. You can also include utilities, grocery bills and any other routine payments you make in this list. If a bill varies from month to month, such as groceries or utilities, average out your past three bills to create a ballpark figure.
Subtract your needs from your income and you’re left with a pot of discretionary money. As long as your basic needs are covered on a monthly basis, you can feel comfortable socking away that leftover money for big purchases.
2Maintain multiple accounts
Consider maintaining separate accounts for different areas of your budget. You can have one for your living expenses, one for utilities and another for groceries. This will allow you to not exceed your monthly budget for each category while carefully tracking your spending patterns in various areas.
If you have a big purchase on the horizon, open a separate account to save toward your goal. You might set up an automatic withdrawal from each paycheck that deposits a small amount of money directly into that account. Once you hit your budgeted goal, you can feel go ahead and make that purchase.
3Think outside the bank
It’s important to give yourself incentives for meeting financial goals. You can also consider tying big purchases to life goals.
For example, you could reward yourself with a new pair of running shoes if you’re able to commit to visiting the gym at least 15 times in the next month. Or, if you desperately want to visit Japan, task yourself with becoming conversational in Japanese before you can spend a dime on travel.
This approach ensures you’re truly committed to your big purchase before you rack up any debt. Plus, it gives you ample time to set aside money for those expenses. Make sure your goals are measurable and tangible so you can definitively know when it’s time to loosen the purse strings.
Used responsibly, credit cards are amazing tools that allow people to cover expenses when they’re short on funds. But, when debt lingers, it can work against you.
See Also: 9 Valuable Credit Card Perks
By planning ahead, you can make big purchases without taking on insurmountable debt. Whether you want a new car or an upgraded smartphone, managing your money is less about what you want today as it is about making sure you can pay for what you need tomorrow.
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4Author: Darin Namken
Darin Namken is an innovative entrepreneur who co-founded CreditSoup in 2000. He serves as CEO, steering the mission of the company and specializing in new business development. CreditSoup was founded as a borrowers’ marketplace for consumers seeking various financial products, providing people with information and credit solutions to meet their needs.