Regardless of your personal financial situation, here are three simple things you can do to protect yourself from debt starting today.
It’s almost impossible to live debt-free; most of us can’t pay cash for homes or children’s college educations. Things like buying a house and funding education are all examples of reasonable debt.
While your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36% of your gross monthly income, anything below this is considered appropriate.
But these days it’s so easy for most consumers to be approved for loans and credit cards that many people are getting caught up in bad debt as well. Bad debt includes debt you’ve taken on for things which aren’t essentials and that you can’t afford (think travel, expensive cars or unnecessary shopping). The worst form of bad debt is credit-card debt since it usually carries the highest interest rates.
Understanding the difference is important to insulating yourself against debt in the first place.
Bad debt is the type of debt you usually hear people talk about when they discuss debt. Bad debt is debt that has little to no potential for making more money than you started with and usually ends up as a loss. Offers like “by now, pay later” and “interest-free financing” often lead to out of control debt.
Most auto loans also fall into the bad debt category. Cars do not appreciate in value and therefore are not a good debt investment.
These offers are most often used to purchase impulse or non-necessary items, so fall into the bad debt category. It’s best to stay away and save up instead of buying on one of these offers.
Accidents and other misfortune happen. It’s a fact of life. But these situations shouldn’t ever cause you to go into debt. Having an emergency account with at least £700 in it at all times is one way to insulate yourself against this debt. Make sure you don’t touch this money unless it is an actual emergency.
Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Depending on your specific situation and whether or not you have children, carry substantial debt and types of insurance coverage will determine what amount is best for you.
If you currently don’t have an emergency fund or find it difficult to save money the key is to start small. Realise that accumulating one month’s worth of expenses will take some time, let alone three to six months worth. If you set your immediate goals to be small and manageable you will have a better chance of reaching them.