Let's Talk About Debt

What does it mean to go into debt? The simple answer is, you borrowed money and now you owe it. 

There are two types of debt, secured and unsecured. Let me explain the difference between the two. 

A secured debt is one that is secured by collateral or an asset the lender can seize if you don’t make your payments. Examples of secured debt would be your home and your car. Unsecured debts don’t have any collateral behind them. The lender can still take legal action to get their money, but there is no asset they can seize from you. Student loans and credit cards are examples of unsecured debt. 

Debt can be caused by a variety of factors, when you spend more than you can afford you can fall into debt very quickly. Some of these circumstances are just a result of everyday life and situations that many people encounter. Some of life’s experiences may include having children, moving into a new home, unexpected medical emergencies or even divorce. Others may stem from poor money management or failure to make payments on time.  

There is a common saying, “Hope for the best but prepare for the worst.” Although we cannot control unexpected life events, we can prepare for them.

It can seem dooming, and you may not know where to start but I am here to help. 

1. Plan as much as you can. Having a well-planned budget is the best way to prepare for the expected expenses. Birthdays, vacations, holiday shopping, these are all events that you can prepare for. Open a vacation and/or holiday club at your local bank or credit union. You can have a set amount transferred from your checking right into the designated account. Start small with $5 to $10 per week. One or two less trips to the coffee shop can helping in making it a reality. I have a very large family. There is always a birthday, wedding, baby shower, or some other type of event every single month. I put away a little each week towards a special account just for those events. If money is so tight that you cannot do the same, there are plenty of ways to show your loved ones that you care without spending a single dime. 
2. Build an emergency fund. And use it for exactly what it is, an emergency. The new boots you saw online that you just “need” to have does not constitute as an emergency. If you own a car or home, or have children, you know there is always something that pops up. Wouldn’t it feel great to know you can cover it without having to use a credit card and get further into debt? The traditional recommendation is that an emergency fund should contain roughly three to six months’ worth of living expenses. That amount may sound daunting to you at first, but you can start with small goals, $500 to $1,000 is a great start. With a solid emergency fund, you can have peace of mind that if something unexpected comes your way, you will have the funds to absorb the financial impact. 
3. Save money regularly and automatically. Have a portion of your paycheck automatically transferred into a separate savings account. (This account would be separate from your emergency fund account) It is crucial you pay yourself first. Don’t have your entire paycheck deposited into you checking then pay your bills and think you will save what is left. I can guarantee that you will save nothing this way. If it is out of sight, it is out of mind. That is why it is so important to save first! 
4. Grow your income as best as you can. I have heard often, “I don’t have any money left over after I pay my bills.” “Or I would love to be able to save, but I just can’t.” Listen, I get it, you are stretched thin. That is when you need to be creative.  I bet if I was to look at your budget, I could find somewhere, somehow you can save. Look at your job, is there a way to pick up an extra shift, are you able to ask for a raise or even pick up a part time job? Can you start a small business or side hustle? Is there something that you are good at where you could charge for your services? There are a ton of ideas out there to help you get started. The internet is your best friend. 
5. Stop overusing your credit cards. Remember? Credit cards are loans, and you must pay them back, most times they come with a very hefty interest rate. Those interest-free credit deals can sound tempting, but if you fail to keep up with the payments or are already struggling with others, it’s best to avoid them altogether. Plan to pay them off. Start off with the smallest balance and work your way towards the largest. Talk to your credit card providers about a debt management plan and get the help you need. 

Poor money management is the quickest way to get into debt. Get on top of your debts before they get on top of you. Start a spending diary and keep track of every penny that comes in and comes out. At the end of the month, see where you could have made different choices. Look at your bank statements each month. Make sure you are not paying overdraft fees or maintenance fees to your bank. There are plenty of credit unions out there that do not charge any maintenance fees. That alone could save you $120 a year if not more. Hmm, $120 sounds great in an emergency fund. 

The bottom line is, by taking any of the above steps, you can start moving beyond living paycheck to paycheck and work on growing your savings account balance- no matter what comes your way, and you will be better prepared for unforeseen life events. 

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