Avoiding Financial Setbacks #4 - Avoiding Debt & Credit

This is a five-part series designed to educate readers on Avoiding Financial Setbacks.
These will not be displayed daily but as time passes on.

It’s amazing how the English language have so many words that have the exact same meaning. Loan, liability, credit, debt, borrow, they all have the exact same definition! If you’re just starting on your own personal financial journey chances are debt is what made you re-evaluate not only your spending, but your entire life as well. Sometimes we wait too late and it takes a drastic outlook on your own life before you decide to make that ultimate change. I know that was the case for me! Come on, $25,000 in debt due to student loans, unpaid bills, and credit cards from past & failed businesses would make anyone re-evaluate themselves (hopefully!). Well, honestly, I didn’t know how much debt I owed when I first began. It took me to take a look at my credit report in 2007 to have my own eye-popping moment. I knew this had to change, so I began devising of ways to make the change for the better. So the advice I present is from my own experiences, learn from my mistakes so you don’t make the same in your journey.

Can you imagine how huge of a setback all of these liabilities were? Even today, I have to use my own earned income to pay off loans that were taken out years ago! This money should be used towards investments, savings, retirement, or even my business; but I have to dedicate this money towards debt if I want to true net worth and do not want the debt cloud hanging over my head forever.

In today’s series of “Avoiding Financial Setbacks”, I will speak on the top and primary tips and keeping yourself from gaining debt and/or sinking lower into your debt mountain and resulting in avoiding yet another financial setback.

Avoid Debt & Credit

• You Don’t Need Loans - In plain words, STOP BORROWING! The reason why the Fed lowered the interest rate to 2.25% from 5.25% a year ago is so that businesses and consumers and borrow more money on a cheaper interest rate, but regardless if you borrow $10,000 at a 2% interest rate, you’re still $10,000 in debt. Borrowing is not free money; it’s BORROWING. And borrowing equals liabilities (a 5-syllable word for “debt”). Unless you’re planning on going to school, buying a house, or looking to fund a business, loans should be the last on your mind. Even with school, property, and businesses, there are alternatives before running to the bank and asking the teller for a loan.
• You Don’t Need Credit - Credit was no friend to me either. I looked at credit as a means of free money to repay at a later date. Credit is actually a very high interest loan. The very second you use credit, you are taking a loan from that credit limit to where you re-pay at a 13% or more in interest over time (yet, some are lucky to receive a lower APY). My problem was, I didn’t realize that and the next thing you know, I can’t repay and in that instant I’m in debt. Another setback.
• Don’t buy what you can’t afford it - That’s it! If you don’t have the cash you cannot afford whatever it is you want to buy. Since I began my financial journey and became more disciplined with my money, I signed up to one credit card and I have not paid a single penny of interest since owning it. The trick? There is no trick. I use my card primarily for bills. And I always make sure I pay off the card the very next day (no more than a week after the initial payment). I don’t give their system time to generate interest. I make sure I have the money before I buy. Now, of course, this wouldn’t apply if your purchasing six-figures homes and properties INTELLIGENTLY. But when it comes to paying bills, eating out, or any leisure or luxury items, make sure you have the cash. Do no rely on credit. Remember: Credit is another word for Loan.
• The Importance Of An Emergency Fund - One thing that credit is good for is that you will have a source of funding in hardships and times. Some unfortunate accident may cause some immediate cash that you will need to be readily available to you. I understand fully that sometimes you need and immediate source when the time calls for it. But why does credit have to be that source? Why can’t you create your own source? If I’m not the first personal financial blogger you visited, then you have heard all of the importance of an emergency fund. Look back at a couple of my posts and I make several mentions to building an emergency fund as well. The reason why we personal financial bloggers push this topic so much is because no one knows what is going to happen tomorrow. Having an emergency fund protects you or even lowers the financial and obligation towards you. If you were to lose your job today without a fully funded emergency fund, what would you rely on for income as you search for a new position? If an accident occurs which causes you or a family member, God forbids, to have to take an unfortunate visit to the emergency room, how will you pay the medical bills? Yes, credit may help save you from a sticky situation, but it is not something you want to heavily rely on. In fact, the sticky situation that you believe may save you may put you in an even more damaging position. Contribute what you can afford to your emergency fund and build it to a maximum goal. Most suggest building it up to at least 6 to 12 months of your necessary expenses (primarily bills). Some say at the very least have $1,000. I have combined the two advices, I’m looking to have at least $1,000 while building it up to at least 6 months worth of net income over the year. You pick your amount and take it step by step. But once you’ve reached your goals, then you will have those extra funds saved for when you need that emergency cash without having to turn to credit. Also even having a strong emergency fund can keep you from tapping into long-term assets such as 401K and other retirement funds.
• Prioritize spending - In a way this fits with “Don’t buy what you can’t afford it”, but I wanted to place a bit of urgency on separating wants from needs. I also spoke of this in the Part #3 series post “Splurges”. You’d be surprise how many people end up with so much debt due to excessive purchases and splurges. According to CardData.com, US consumers racked up $51 billion dollars worth of fast food on their personal credit and debit cards! $51 billion dollars? You mean to tell me, that US consumer don’t have $3 in cash to buy a Big Mac yet they are able to preserve a $19,000 credit card limit? Even today, 40% of transactions are made in forms other than checks and cash. With numbers like these, it obvious to see that spending priorities are not on the top list of US Consumers and the government and the Fed loves it, because when we pay taxes on these items they reap heavy benefits. Separate wants from needs and make an intelligent decision before you pull out your wallet and purchase something you know you do not need.

Loans, debts, and credit are the primary sources that a lot of personal financial bloggers exists today. It is the reason why many of us begin a personal financial journey. It is one of the causes of the our economic discrepancies. It is the reason why the bankruptcy laws exist. Strangely, it is what keep our nation going. Financial setbacks come in many forms and debt is probably the most damaging of them all. In this post, I only touched on a few major points of avoiding debt and credit. Take this information and apply it to your lives and make the changes you feel necessary. During your journey, you will need to do everything in your power to avoid or limit financial setbacks. Good luck and don’t stop.

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