Debt, or borrowed money, is a necessity in today’s world. It allows us to buy or do things that we can’t afford right now. So, in some point in life, we’ll need debt – for studies, buying a car, buying a house and so on. In addition to buying what we need and want, debt can be used to make more money. That’s why there’re bad debts and good debts. Generally speaking, bad debts are those that end up making you spend more money. On the other hand, good debts are those that end up making you earn more money. Bad debts are those that we should avoid having too much at all times. Mismanagement of debt is one of the factors that cause financial problems such as debt traps.
These are some of the things to keep in mind to avoid falling into debt traps:
Keep yourself employed with a steady income
Although this is an obvious one, it’s very important. When you have debt, you’ll need to pay repayment bills when they’re due. Without employment, there won’t be any income. So, if you’re uncertain about employment, don’t be involved in debt.
Have an emergency fund
Life is full of uncertainties. An emergency fund can help keep you afloat in difficult times. Next time you receive your pay, consider setting aside a small amount to build your emergency fund. You’ll thank yourself for it when it’s needed.
Be aware of credit card debts
Credit cards are one of the worst types of debts. They generally attract very high interest rates compared to other debts and they can easily encourage bad spending habits. Therefore, you should always minimise the use of credit cards. If you ever need to use one, make sure you pay it off as soon as possible. Otherwise, you’ll just end up paying more and more of your hard-earned money to the bank.
Do research before you buy
This is particularly important when you’re buying something big and expensive. Doing research can help you save a lot of money, and it’s not that hard. We have the internet nowadays. Shop around before you buy. Google the product. Are there any other places that sell it for cheaper? See if there’re any coupons for the retailer that can save you more money. With the internet in hand, the information is just around the corner.
Doing research can help save a lot of money and determine if it’s good or bad debt.
Pay your debts on time
This is important in order to maintain a good credit score. Your credit score determines your ability to borrow more in the future. You won’t want a bad credit score because if you have one, you won’t be able to use debt when you need it. If you have savings sitting around and not doing much, you might want to use them to pay off your debts. Remember, the longer you hold the debt, the more money (interest) you’ll end up paying to the bank.
Debt is the worst form of poverty – Thomas FullerTweet
Be aware of your spending limits
There’s nothing more important than knowing what you earn and spend. This involves budgeting, which will be further discussed in another article. Spending more than what you can afford can easily put you into a debt trap. Remember how we talked about credit cards? So, if you can’t afford it now, don’t buy it yet. It’s important to accept that we’re not able to afford the luxuries we want all the time. In such times, we need to focus on the needs, and cut the wants.