The Secret to Being Debt Free
Being debt free can be a complex process, but the basic premise is fairly straightforward: bring in more money than you put out. Debt can be caused by a number of factors, including sudden loss of employment, ill health, compulsive spending and large, unexpected expenses. The higher the interest rate on a debt, the more damaging it can be to your finances.
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Keeping a Budget
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Knowing where your money is coming from and where it is going is key to maintaining control of your budget. Keep a notebook in which you write down everything you make and everything you spend. This will help you to remain consistently aware of your financial situation, and will reduce the risk that you may sink deeper into debt without realizing it. Go through your budget every year and itemize your spending so you can see how much you spend in each category such as for rent or mortgage, utilities, insurance, food and entertainment.
Avoiding Impulsive Spending
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A written budget is most important for people who are prone to impulsive spending. This activity is engaged by people who think of shopping as a recreational activity in itself, rather than as a means of acquiring needed goods. There's nothing wrong with buying something that you want, but you should do it consciously with full awareness of what effect it will have on your budget. Many people find it helpful to wait a few days when they are thinking about buying something. With this perspective, you may find that the purchase doesn't make as much sense as it did on the spur of the moment.
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Reducing Carrying Costs
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Carrying costs include amounts that you put out every month or several times a year, including rent, interest on debts, car, house and health insurance and utility bills. Investigate ways to reduce these as much as possible, freeing up money that can go to reducing your debt. Consolidate your insurance coverage with one company at a lower rate. Cancel cable plans that you aren't using. Refinance your mortgage with a lower interest rate. Research your phone and Internet plans to find out if you're getting the best deal possible.
Making Your Money Work
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When you pay interest on a debt, your hard-earned money is going into someone's pocket. You can turn the tables on this situation by investing your money in stocks, GICs or other interest and dividend bearing financial vehicles. Even if the interest isn't large, using your money to make money is preferable to dropping into debt and spending your money to service those debts.
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References
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