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How do you view your debt? Do you use your credit card to supplement your lifestyle? Freely racking up debt on clothes, going out to eat, or vacations? Or do you see it as a burden? A huge anchor weighing down your dreams?
My opinion of debt has changed over the years. Early in my adult years, I didn’t think much of it. Everyone has debt, right?
Whether you’re drowning in debt or just starting to realize you might have a spending (a.k.a. DEBT) problem, here are the top ways to keep your debt from destroying your financial future.
Understand your debt-to-income ratio
If you have future plans to buy a house, save so you can retire in comfort, or just live comfortably now, you need to understand why the debt-to-income (DTI) ratio is important. Whether you’re seeking a loan, a mortgage, to get a better rate on car insurance or a great APR on a credit card, everyone in the financial industry agrees that your DTI ratio is a major determining factor of your reliability and determines if you’ll get approved for what you’re asking for.
Your DTI shows whether or not you have a good balance between debt and income, which tells a prospective lender (or employer) if you’re responsible with your money.
How is it calculated? It’s simple: add up all your monthly recurring debt and divide it by your gross income. Or use this simple DTI calculator at bankrate.com.
Develop healthy financial habits
Winning with money is all about developing good financial habits. Easier said than done, I know. But it’s important, so stick with me on this one.
So, what habits are the best ones to have?
When the unexpected happens – your car breaks down, your furnace stops working, or you have a catastrophic illness that puts you out of work – building these four financial foundations now will ensure you have the money you need when you need it:
- Pay bills on time
Avoid late fees that eat up more money out of your paycheck
- Debit instead of credit
See the next point of “just say no to new debt”
- Reduce expenses
Cutting cable or eliminating your daily vending machine trip can add up over the long run
- Emergency fund
Having some savings puts a cushion between you and life, and helps you avoid new debt in the future
Just say no to new debt
As a natural overachiever, the only area I want to be below average is in the category of consumer debt. According to Bloomberg, the average American has a credit card balance of $16,000 (and total household debt totaling just under $132,500). Yikes.
As you work toward eliminating your debt, you’ll discover how painful it is to give up that money every month. It’s no fun paying on debt – it’s like throwing money out the window. The good times you had spending that money are long gone and all that’s left is the bill.
The harsh reality of your new debt-busting lifestyle is a tough pill to swallow. Hopefully, the slow, painful process of eliminating your debt is enough to keep you from going further into debt.
Don’t rush toward bankruptcy
I know bankruptcy can seem like the easy way out, but it isn’t always the best solution to your money problems. It not only affects your credit, it impacts your reputation – both personal and professional – and can cause harm to your own self-image.
It ruins your credit and destroys your financial future – it can remain on your credit report for up to 10 years. What seems like a great short-term solution can make it harder to get a mortgage, car loan, credit card, and even a job, for years to come.
When it comes to bankruptcy, there’s almost always a better option. Instead of filing for bankruptcy, consider these alternatives:
- Get on a budget and stick to it
- Reduce your expenses
- Contact a credit counselor
- Check out more ideas to avoid bankruptcy from the Credit Info Center
Personal finance is important and there is a lot of conflicting advice out there. I understand that it’s confusing and that’s why you throw your hands up and do what feels good. No one wants to talk financial responsibility or budgets or debt-to-income-ratios.
But using these tips and putting them into practice can safeguard your financial future. Give it a try and let me know how it goes!