Live Within Your Means – Avoid / Eliminate Debt

This is Part 4 of the series of personal finance tips for my Siblings, “How Not to Blow Up Your Financial Future”.

Disclaimer: I am neither wealthy nor a financial professional- read at your own risk!

Let’s check out the overview of the 5 Steps to Not Blow Your Financial Future:

1. See the Big Picture.
2. Do the Math.
3. Set a Plan: Budget.
4. Live Within Your Means: Avoid / Eliminate Debt
5. Save: Earn More and Spend Less.

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Money is a terrible master but an excellent servant.

P.T. Barnum

Step 4. Live Within Your Means: Avoid / Eliminate Debt

We learned about budgeting, which should help you spend less than you earn. Now let’s talk about the most common stumbling block in personal finance—debt.

Using a credit card or getting a loan comes with costs like interest and fees, which compound if they are not paid in full on time. They can often send predatory offers.

Avoiding Debt

Consumer debt should be avoided at all costs. It’s way too easy to rack up, and can get out of control to the point where it’s devastating.

What are some tips for not falling into the debt trap?

Don’t count your chickens until they’ve hatched.

Sometimes those eggs don’t make it! If I’m about to get a promotion, bonus, payoff, it is not wise for me to count on something that has yet to happen. I wait until that money is IN MY HAND (or account) before I consider it. I can dream, have goals, and forecast for predictions, but I do NOT spend nor budget for money that might happen—only what is here and now. Waiting to spend until money is in hand allows me to determine my priorities, avoids impulse buying, and keeps me from overspending or over leveraging when Murphy’s Law hits.

Anything that can go wrong will go wrong (at the worst possible time).

Murphy’s Law

Am I letting desperation or overeagerness lead my actions? Am I making decisions with confidence and preparation, or fear? Do I feel peaceful with this?

Not to say that you can’t live your life optimistically. Hope for the best, but be prepared for the worst. For me this means being conservative when it comes to debt, especially the amount—only taking out what you honestly can COMFORTABLY pay. This means that if things go sideways where you lose your income or run into an emergency, will it be covered or will it crush you? Taking on too much risk by taking on too much debt can leave your personal finances vulnerable and have long lasting negative consequences, especially if you have others depending on you like children or employees.

Kat Example

We found the perfect home in a beautiful location. The bank approved, and on paper it showed that we could afford it. The mortgage monthly payment seemed doable, but after all of the costs associated with closing and maintaining a home (well over the tag price- closing costs, PMI, insurance, escrow, property taxes, HOA fees, etc.) the numbers were much higher. I knew the real budget after working with it monthly, and the actual numbers with the new mortgage would be over budget. I would need to go back to work for a dual income household. My husband was still being offered a job and in transition as an intern. This situation would be difficult- our son had special needs and I was his caregiver, and I wanted a mortgage so affordable that only one of us needed to cover it if something happened to one of us. I was determined that we would own our house, not have a house that owned us. I couldn’t shake the stress of how it actually wasn’t affordable for us, even if perhaps in the future it might be doable—I wasn’t willing to chance that we’d somehow make the difference every month until we were in a position to actually afford it. We backed out of the house at closing, and WAITED- ended up finding one exactly within our budget in a different town we hadn’t considered which allowed me to be home and provide peace of mind for our finances.

Living within your means and setting aside even a small savings can protect you against unnecessary debt, and provide peace in times of hardship.

Debt as a powerful tool

Debt can be a powerful tool in creating value or seizing an opportunity (examples to follow). I disagree with only waiting to buy in Cash, especially with large purchases such as a $100,000+ home where over time the market price will increase much faster than the rate that the average buyer can save. If we go back to Doing the Math, compare the opportunity costs of either scenario and you will see that sometimes paying in Cash will actually cost more in the long run. In the short term, Paying off debt in full every month helps to build your creditworthiness, establish a credit history, and gives better buying power to invest NOW and free your cash for investment or growth.

How can you figure out what is a wise thing to go into debt for, and what isn’t?

Good Debt is Wealth Building.

It may be worth it to go into debt when it builds wealth or increases income over time, **as long as you are also able to live within your means**!

Some examples of good debt include Education, Vehicle, House, and Business. You still need to do the math because borrowing money costs money (interest and fees), which should be a major factor in whether you can afford to take on the debt. Good debt pays for itself and a lot more within a reasonable timeframe.

Kat examples

Example 1: Should I get into debt for a car? Maybe right now you are limited to jobs that are within walking distance, or your schedule relies on the bus when you’d like to be more flexible with your time, or you find you’re paying the equivalent of a car payment on Uber rides and might as well jump in. What is it costing you now and in the near future to live without a car, versus what would it cost you to get a car? Having a car would allow you to show up to your job which is providing for the car payment (paying for itself), save money because you could be using that extra time on a side gig instead of waiting for the bus, or being worth every penny for the independence you get. If you go for a car that’s within your budget, that could be an example of a Good Debt.

Cars require insurance costs, fuel, and regular maintenance like oil changes. If you go for a car that’s really cheap upfront, you may need to build into your budget much higher repair and service costs, or pay for a warranty. If you buy new, the car decreases in value by at least half as soon as you drive it off the lot—not worth it in my opinion. Save on the total cost by getting your car from a reliable used dealer backed by warranty.

Example 2: School… I’ll talk about that in Earn More (next step).

Example 3: I should really make a new post about Housing and a Mortgage…

Eliminate Debt

We should probably talk about Ways to pay down debt faster.

Snowball- pay off highest interest first. Restructure for lower interest rates. Pay on time and in full. Don’t take on more debt.

Check out the next step here.