Nearly 50 percent of Americans have expenses that are equal to, or greater than, their monthly income. Sound familiar? It should.
That’s every other person who is spending their entire monthly paycheck without putting something aside for a rainy day.
And rainy days do come in the form of getting laid off or car-related troubles and resulting medical bills from injuries. (See noll-law.com/personal-injury/car-accidents/ for more.)
When unexpected costs appear, households that spend their monthly income as quickly as they receive it have few options. They can turn to personal loans, or place extra costs on credit. Both options can quickly escalate into mounting credit card debt.
The solution seems simple, right? Spend less than you earn, and everyone wins. But for those living in areas with steep housing costs, simply moving to a new location is not as easy as all that.
So what can individuals do to stay out of debt in the year ahead? Here are answers from the experts:
- Know your spending groups.
The US Bureau of Labor Statistics posted the expenditures of the average American by percentage and type. Housing clocked in as the largest expense at 41 percent of the average person’s income. Followed by transportation at 16 percent and food at 14 percent. Healthcare, utilities, and entertainment followed in that order.
The first line of defense: Do the math. Sit down with a calculator and track your spending for the last 3 to 6 months. You may be surprised at where your money is going. Thought you weren’t spending so much on baby-sitting? Think again! The real benefit to doing this is that your true spending habits will be revealed.
- Adopt a pay-it-within-30-days rule.
According to a NerdWallet analysis, the average household credit card debt is about $15,654. And the total credit card debt in America was estimated to reach $905 billion in 2017.
There are definite advantages to using plastic, such as building a credit score and making use of credit card company’s rewards plan. What’s the secret to using credit cards responsibly? Only use your credit card if you can pay off the full amount within 30 days of purchasing the item.
If you need to break up payments to afford the item, that should serve as a huge warning sign to stop and wait until you can buy the item right out.
- Beware of lifestyle inflation.
It happens to all of us, even for those who are opposed to the idea. After all, you can’t show up to a fancy job without a new suit… That’s one way we excuse making unneeded upgrades that can quickly have a person in over their head.
Another has to do with feeling deserving now that you are bringing home a larger paycheck. Surely you deserve that $899 espresso machine…
Investing in items that enhance our quality of life is not inherently bad. But such spending is what causes a person to spend their entire paycheck with little to fall back on when an unexpected cost arises.
How to keep lifestyle inflation in check? The Simple Dollar suggests having monthly saving goals that you must hit each month. Did you contribute to your 401(k)? Did you add to your emergency fund? After you’ve reached your goals, the cash that’s left over can be treated as your “fun” fund.
- Keep to your budget.
We’re all guilty of impulse shopping or shopping to feel better about ourselves. Bad day at the office? A stop at the local pub might fix that. Or getting that dress at the mall you had your eye on…
Getting a firm handle on your spending habits and staying out of debt means sticking to your budget. If you need a pick me up, call a friend or hit the gym. Don’t use your credit card to soothe your spirits. It won’t work out well in the long run.
- Get a second job.
Cutting back on expenses will only get you so far. At some point, you will reach a limit of what you can cut without hitting a drastic reduction in quality of life. And the goal is not to suffer. The goal is to stay debt free and work toward financial stability.
Consider getting a second job, asking for a raise, or considering monetizing a hobby. Raising your income is a quick way to protect yourself from debt risk.
Don’t know what you can do that will boost your income while keeping your day job? Drive for Uber. Run chores for people. Offer your skills on Fiverr. List a room on Airbnb. The opportunities are out there and waiting.