Financial habits that will get you out of debt

Many people struggle with debt strictly because they don’t know how to put their finances together. When a person gets used with a certain pattern of earning and spending money, it becomes a habit. In most cases, these financial habits are the main cause of why people accumulate debt.

Financial literacy became a highly discussed topic in the past few years, as people could change their situation by getting informed about what habits are beneficial and what habits just ruin their budget. As in any other domain, doing thorough research and gathering relevant information about this topic should propel you to the right path. This short guide explains which habits should be adopted in order to handle finances better, without encountering unpleasant situations or accumulating even more debt. Here’s what any person who’s not familiar with good finance practices should do:

Spend less than you earn – the basic principle

This is basic knowledge – to stay away from debt, you can’t spend more than you can afford. Figuring out the numbers and staying within the limits is not as difficult as some people consider. You just have to build a consistent monthly budget plan and stick to it in the future. Expense tracking starts with separating the needs from the wants. People end up drowning in debt because they don’t know when to stop spending money for their own entertainment. Start by calculating your monthly income, from all sources. Once you know how much money you can spend each month, separate the fixed expenses from the variable ones and notice what amount is left. Keep in mind that paying debt faster involves making some financial efforts that can get inconvenient at times. You can also use mobile apps where you can add both your income and expenses. This automates the process and it will become a habit easier.

Always have an emergency fund

Even though you are currently struggling with debt, you can’t skip your emergency fund. This fund can save the day when the most unexpected events occur. Without an emergency fund, you will have to obtain a loan or borrow money from friends and family. Such a situation will send you back to the hellhole where you’ve come from. No matter how small the amount you save each month is, having an emergency fund prepared is mandatory. Instead of eating out two times a week, do it less often. The money you save can go directly to the emergency fund and you will possess some extra cash for an unexpected situation. This way, you don’t need to borrow more money and you get to keep the expenses on the same line for a while.  

Use the avalanche method to pay off debt

When you have multiple debts to pay, you need to focus on the interest rate. The interest rate determines how much money you are going to pay in the end. By paying the debt with the highest interest rate quicker, you repay less money. Moreover, prioritizing your debt and paying the high-interest ones first should help you get out of debt quicker. To form a habit out of this, determine which one of your debts has the highest interest and focus on it until it is gone. Do that for the other debts you need to repay and you will get used to the avalanche method in no time.

Get informed about IVAs

If you can’t figure out which debt you should pay out first, there’s a more convenient method that will spare you the effort. IVAs, or Individual Voluntary Agreements, are an alternative for people who don’t want to go bankrupt. Bankruptcy comes with many downsides, while IVAs have a series of benefits that could be convenient for any person struggling with too much debt. IVAs can write off up to 70% of a person’s debt, once the debt is managed. What is so convenient about IVAs is that you decide how much time you allocate for repaying the money. IVAs bind creditors to freeze debt interest, so the amount you pay each month will remain fixed. You can understand how IVA companies work by accessing this link.

Create multiple sources of income

Relying on one source of income only can be dangerous, especially for those who need to repay debt. You can get informed about various methods to produce passive income. The second source of income could keep you away from bankruptcy if an unfortunate event occurs and you no longer have enough money to pay off debt. In this situation, you are one step closer to bankruptcy. Think about methods to generate money from different sources and focus your attention on debt consolidation, IVA companies, and other similar solutions to make sure that you can afford to repay the amount you owe.

Automate bill paying

Another habit that could help you handle finances better is bill payment automation. Bills are part of the fixed expenses that you will have to pay at the end of the month, regardless of how much money you won. Many people end up having debt without even realizing it because they postpone paying their bills. The amounts add up to a bigger, unaffordable one and you find yourself in a very uncomfortable situation. Check with your suppliers and see if they have an option for automating bill paying. If yes, it would be recommended to opt for this method instead of paying the bills yourself. It will seem inconvenient the first couple of months, but it should become part of your financial planning quite soon.  

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Implement a spending freeze

Starting a spending freeze challenge could change your life completely. Spending freeze involves buying just the things you need to survive and redirecting the rest towards paying debt or contributing to emergency funds. In order to stick to a spending freeze challenge for at least three months, you need to come up with a plan and set clear goals for this period. If you live alone, the spending freeze challenge shouldn’t be complicated. If you live with your family, you must ask the rest of the members to join you Always keep a positive attitude during spending freeze periods and don’t get discouraged after each obstacle that you encounter.