Upon the heels of my Financial Budgeting 101 series, I wanted to do a series about Living Debt-Free and give you tips and ideas on how you STAY debt free. If you have something to share, please leave a comment to help me and others!
#1 Task for Staying Debt-Free - The first step to living debt-free is to make sure that you have an emergency fund! If you don't do this, then you probably won't STAY debt-free for long because things break, cars need repairs, kids get sick and on and on and if you don't have money set aside to pay for these things, then what will you do? Borrow or put it on a credit card and pay interest. Many financial advisors recommend you have 6 months worth of living expenses (not income but expenses) saved up in a savings account somewhere that you can get to easily in the case of an emergency. This will help ensure you staying debt-free when trouble shows up at your door and it will.
#2 Save for future purchases - If you plan on buying a big-ticket purchase in the future, which most people do, then you need to have a fund to save for it since you are no longer using credit and paying extra with interest. Most people need a car these days and if yours is older, you probably should start saving up for a newer one. Save until you get enough and then go shopping with cash! Not only will you save on all that interest, but you will get a reduced price by paying cash and if you can trade-in your older car, you will save even more. Say goodbye to car payments with interest and hello to saving and buying a car with cash! You will feel awesome when you ride that car off the lot knowing it is PAID FOR!
More things that you can save for are: electronics (computers, gadgets, etc.), furniture, school supplies or homeschool curriculum, vacations, appliances, and whatever else is a big purchase that needs time to save for.
I will give you an example of a car fund and how it would work to save up for one. Say your goal is to purchase a newer car in 3 years. A good, reliable used car for $12,000 is your goal and your current car will have a trade-in value in 3 years of about $3,000. Subtract the value of your trade-in from the price of the newer car and that leaves you with needing to save $9,000. Now you know you will need to save $250 a month and you will be able to shop for a $12,000 car - which could very well be a much higher car but you can negotiate that down to $12K easily when paying cash! Say, you just want to spend $8,000, so subtracting your trade-in, you only need to save $5K, which is only $139 a month. No interest to pay, just the price of the car - now that is freedom!
#3 Insure Everything - This is one area you must do in order to stay debt-free. You can't predict the future but you can insure that you are covered when something tragic happens. This includes health insurance, home/renter's insurance, auto insurance, life insurance, disability insurance, identity protection and anything else that you need to insure that has the potential of bankrupting you or ruining your financial life. Trust me as I know personally what it feels like to be WITHOUT insurance and a crisis happen - we have paid our share of medical bills because of our lack of health insurance a few years ago.
For those that think you can do without life insurance, well you CAN but are you sure you want to? What if your husband dies today. How would you pay for his funeral? Or better yet, WHO wants to think of how they will pay during that time? You will be grieving and you sure don't need the extra burden of financial ruin. It isn't just the funeral either, how will you support yourself or your children? What will you do until you find a job? How will you pay for child care? And on and on..... These are things a lot of people don't think about until something like this happens and then they spend the rest of their lives thinking about it.
Same thing goes for disability insurance in the event that your husband becomes disabled and can no longer work. Disability from Social Security is barely enough to even live on, much less support a family! The rest of the insurances are really no-brainers, I mean if you go without home/renter's, auto, identity protection or health insurance - you are just one crisis away from debt and/or bankruptcy. Insure everything!
#4 Live Within or Below Your Means - Most people agree in living WITHIN your means, but how about living BELOW your means? If you live below your means, you can save a whole lot more. Whatever you do, always live within your means and not above!! If you make $50K net - live on $40K and throw the rest in savings. Then, if one day you get the urge to go to Italy - hey, just GO! Or you could live on the $50K and have a bigger house, nicer car and more luxuries if that is what you choose. I prefer to live below our means because to me, that Italy trip sounds pretty sweet!
Part 2 is here where I give you ideas and tips on living within and below your means: