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How to Stay Out of Debt

  • Mary Hunt The Cheapskate Monthly
  • 2003 26 Nov
How to Stay Out of Debt

The Average Family Owes Over $8,000 on Credit Cards Alone

With layoffs increasing and the stock market stumbling, now is not the time to be heavily debt.

Consumers rarely fall deep into debt all at once. Instead, their expenses outpace their income little by little until the balance becomes unmanageable. Once that happens, they have to make lifestyle changes to get out from under.

You don't have to be a tightwad to prevent debt overload.

Simple Strategies …

Identify situations in which you lack financial willpower. Take pre-emptive action based on these behavior patterns.

Catalogs:  Fill out order forms for what you want, then put them aside. One week later, allow yourself to send away for whatever you can actually remember, without looking at the forms. You will wind up buying only what is important, or more likely nothing. You won't even remember what you just couldn't live without just one week ago.

Also:  Try to find the items locally to avoid shipping-and-handling costs.

Supermarket impulse buys:  Put any items that are not on your shopping list in the shopping cart's child seat. Before checkout, choose just one item from the child seat. If you find a great bargain, take something off your list to accommodate the good deal.

Long-distance telephone service:  Cancel unrestricted services if you can't control your calls. Use pre-paid phone cards instead. Using a phone card is like using cash, so you tend to be more careful about your phone time. Warehouse discount clubs now sell cards for around four cents per minute. Beware – some sell for 50 cents a minute.

Pay Cash – even for big purchases. It may be inconvenient, but it forces you to prioritize. It's the single best way to eliminate impulsive buying. Cash customers spend 30 percent less on shopping sprees than those who pay with plastic.

If you need extra security, keep a $100 traveler's check in your wallet instead of a credit card. You're less likely to break the traveler's check for an impulse purchase.

Set Up a Monthly Spending Plan …

Log how much you spend each day for one month. Use one index card per day. Put the date at the top and make two columns – "What" and "How Much." Don't cheat or neglect to include "bargains." Include everything you spend.

Create a spending record. Analyze your daily logs, and group expenses into categories – groceries, clothing, entertainment, etc. Most people have about 20 categories. Total the amount in each.

Figure out your income each month – including salary, dividends, interest and other income.

Subtract monthly expenses from income. Most Americans live on about 110 percent of their monthly incomes. You're likely to face debt problems if your expenses exceed 80 percent of your monthly income.

Analyze the logs to identify problem areas. Create new targets so that expenses won't exceed income.

Draw up a new log for the second month with expense goals by category. Again, track all expenses. And again, see if you are spending too much … and identify places to cut back. Repeat this process until you reach your spending goals.

Budget for large expenses. Car brakes wear down over time. But instead of saving regularly for the inevitable brake job, most people seem surprised by the large bill. Everything has a limited life – washing machines and other appliances, the roof on your house, etc. Solution:  Set up a Freedom Account to better prepare for unexpected, irregular or intermittent expenses. Fill a binder with individual pages, and allot one category per page. How it works …

Review your checking account for the past 12 months-to find expenses that did not recur regularly. Most common …

  • Auto maintenance
  • Insurance premiums
  • Clothing
  • Property taxes
  • Vacation
  • Holiday/special occasion gifts
  • Home repairs
  • Appliance replacement

Add up expenses for each category, then divide by 12 to figure out how much you need to contribute each month. Example:  If you have $1,000 a year in car repairs, you need to contribute about $83 a month.

To save for these expenses, open a second checking account that pays interest or a money-market account that offers checking. My favorite:  USAA Money Market. No minimum requirement as long as you make an automatic deposit of at least $50 a month. 800-531-8181.

Authorize automatic deposits to transfer the monthly total of your irregular expenses from your regular checking account to your Freedom Account. Smart:  Create a category called insurance deductibles. Deposit a certain amount each month until the balance is equal to the annual deductibles on health, homeowner's and auto insurance policies. By year-end, if I haven't drawn on my deductibles at all, I keep adding money and authorize my insurance agent to increase the deductibles in exchange for lower premiums. If I never have to use the deductibles, the money is still earning interest.

Example:  If your deductible is $500, save that amount as quickly as possible ($50 a month for 10 months), then hold off and start funding something else.

Large expenses that occur every several years – new car, painting a house – should have a category, too. When you save the amount required, stop funding them. Once the funds are used, resume saving.

Track credit card balances weekly. Most credit card companies now provide you with a password to get up-to-date information on their Web sites. Seeing your outstanding balance will help you avoid taking on debt.

Easy Areas to Cut Back …

Food outside the home:  The typical family spends only half its food budget at supermarkets. Restaurants are the single biggest budget killers. The rest is spend at fast-food places, coffee bars, etc. Automobile expenses…

Tires:  Ask the tire shop if it has take-offs – new tires that wind up in inventory when a new-car buyer decides to replace his/her tires with special ones. Cost: About 50 percent less than original price.

Gasoline:  Not all gas stations or grades of gasoline are the same. Try different grades and stations. Keep track of your mileage, and use the grades and stations that give you the best mileage per dollar.

Movie Rentals:  Save money on video rentals by borrowing movies-free-from the library.

Copyright © 2001 The Cheapskate Monthly.  All rights reserved.  Reprinted with permission.

"The Cheapskate Monthly" was founded in 1992 by Mary Hunt.  What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt.  Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates.   Click here to subscribe.