How to avoid falling back into the debt trap

Staying out of credit card debt is the next step after getting out of credit card debt. In the world of personal finance, you often hear about the four main steps to financial success:

  • Have an emergency fund
  • Pay off the debt
  • Save for future expenses
  • Investing for long-term expenses and retirement

What we don’t talk about much is having no debt once you’ve paid off your debt the first time around. For the purposes of this article, we’ll be talking about credit card debt, but many of these principles can be applied to other “bad” debts like personal loans, excessive auto loans, excessive student loans and payday loans.

For many people, getting out of debt is the start of a rollercoaster of debt accumulation and repayment, and then debt accumulation. While it’s success every time you pay off your debt, the next big step is to get out of debt in the first place.

So how do you avoid getting into debt once you’ve gotten rid of your debt? There are several different strategies, and each has its pros and cons.

Pay cash for everything

Some people find they just can’t control their spending when they have credit cards in their pocket. In this situation, avoiding credit cards altogether is the right answer. Of course, you won’t earn cash back or other perks, but those perks aren’t worth building up a balance that you can’t pay off at the end of the month. Be honest with yourself: are you in a place where you can use your credit cards responsibly?

I am not advocating that no one should ever use credit. Far from it: credit is a useful tool and can be a huge ramp to achieve your financial goals, but I agree that some people shouldn’t use credit at all. We must know our own limits in life.

Save for future expenses

I’m a big fan of pre-planning your expenses and saving for expenses in advance. It’s a smart money move, but the reason I like it is because it makes spending less stressful. The child breaks his glasses? No problem, there’s money in the health spending account for that. Uniform boots exploding? The bigger issue is whether the right boots will be in stock, not how to pay for them.

There are a hundred ways to save for future expenses. Some banks allow you to maintain sub-accounts within a single bank account. Many people use a spreadsheet. I have about 10 different savings accounts. Physical envelopes with cash work. (It was our first step into pre-planned spending, and it changed our financial lives.)

It does not matter How? ‘Or’ What you do it, as long as you do it.

Build safeguards into your financial plan

Guardrails are important in life. They keep you on balconies, they keep cars from crashing into rivers, and they help keep your financial life on track. There’s not much damage you can do if you’ve built the right railings.

What do financial safeguards look like? Sometimes they are tricky. They can be general, like “don’t spend more than you earn each month”, or very specific, like “we only order pizza twice a month”. They can relate to a certain expense category, a certain dollar amount, or a certain percentage of something. A common guideline used to be that you shouldn’t spend more than 25% of your monthly income on housing – although this guideline may have flexed a bit lately.

Great guardrails I’ve heard of include never spending more than $100 without sleeping on it, always buying something used before you buy it new, and following a pre-arranged financial plan.

Ultimately, avoiding getting into debt requires as much discipline as getting into debt in the first place. It’s a bit easier because you generally have more financial freedom once you’re debt free and have experience doing tough things with your money. Use the skills you learned while paying off your debt to avoid getting into debt again. You can do it.

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