It seems that these days, more and more Americans are falling victim to debt. It is a debt that a large abundance of people seem to have a lot of trouble recovering from, and it is something a lot of people are now carrying with them for a lifetime, right up until retirement, which is not allowing for a lot of saving or planning.
It has become commonplace these days for people to max out their credit cards despite sky high interest rates, or to ask a local bank for help by taking out a second mortgage, or a line of credit with no exact plan of how or when it will be paid back. While, yes, it is very helpful to have something to fall back on if an emergency situation arises, all other options should be exhausted first because people fail to realize how high the interest rates are that they are agreeing to, or how fast amounts are going to accumulate.
A great motto to get used to is: "If I don't have it, I won't spend it." Its great to utilize credit cards that offer rewards for purchases, or cash back, but the balance on the card should be paid off that same billing cycle, or if necessary, at least within the next couple of months. Otherwise, instead of having money to put into a savings account, or any other product that gains interest, all of your extra money is going towards paying off the interest that has accumulated.
All it takes is one big purchase with a credit card to result in a person being in debt if they don't have the cash available to back up that purchase. A credit card is not the equivalent to free money. It's easy to say "Yes, I want this item, I don't have the money available, but I'm going to charge it and pay for it later when I have the money." No doubt is it convenient to make this transaction and get what it is that you want, but people should be thinking about how much the item is actually going to cost in the long run.
Just consider this: A pair of shoes that you want might cost you $80. The average credit card right now has an interest rate of about 13.5%. Also keep in mind, many credit cards independently charge a late fee as well for missing a payment. On average, the late fee is around $35. Just one month after purchasing those shoes that were originally $80, you have already paid $125.80 in interest and late fees. If those funds aren't available after one month, that amount will continue to grow. Just one pair of shoes for $80 can set a person back for quite a few months if the purchase wasn't analyzed properly. Just imagine the outcome of a dozen purchases where funds aren't available. This is how people end up in debt, unsure of how to remove themselves from the cycle.
Numerous factors should be considered whenever making any kind of purchase, whether it is large or small. When shopping for a house it's not likely that you will be able to pay for the house in cash. Most people require a mortgage to allow for that purchase, therefore, interest rates are inevitable. However, its important to pay attention to how much money you can safely put down on the house (without exhausting your savings) and what is your monthly payment going to be? Is that amount plausible? It is important to be absolutely sure that you are going to have more than enough money leftover every month to pay for all other monthly expenses, and to have a little bit of money leftover for a savings account, a CD, or anything else that could possibly come up that month.
A very smart idea to utilize when thinking about a large purchase such as a home, or a vehicle, is to make sure if you or your mate looses their job, or source of income, one person's income would be sufficient to keep things going for the time being. Other expenses could be cut out for the time being, such as cell phones, cable, and so on, but the major bills should be able to get paid such as the mortgage, car loans, and utilities. Its not practical to make a purchase that requires both people to be working at a job that pays a certain amount of money, so the bills can keep getting paid. A little bit of leeway should be available for whatever situations could arise such as an illness, loss of employment, a health change, or anything else you can think of.
Keeping a good record of monthly expenses is important as well. Everyone should keep a list going of what bills they pay on a monthly basis, what is the average amount of each bill, what is a necessary expense, and what are additional luxury expenses such as a cell phone, pager, etc. This list will make it easy if you find you need to cut back on expenses a little bit. You'll know exactly where you can cut back, and how much are you currently spending. Otherwise you will find that you are spending much more money than you actually think. It's easy to forget about the bills we pay all the time. You can get as detailed as you want with the list and include financial goals in the years ahead, vacations funds and so on.
Of course, life is full of expenses. You will incur expenses on a daily basis, and there's no getting around that. However, how you choose to manage those expenses is incredibly important, and can set the tone for the size of your savings in the coming years. It's important to treat ourselves once in a while to a nice dinner, some new clothes, a new pair of shoes, a DVD, or a vacation, however these purchases should not be a daily occurrence, especially if the money is not readily available. It's important to plan, and save for luxury expenses, and more importantly, to plan and save for the future. Its very easy to become a victim of debt, especially since many credit card companies and banks make their money off of those people who are unable to pay upfront. Its important to know the facts, and to know how to control your expenses the right way.
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