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By Gary Bordeaux
Special to the Financial Independence Hub
In the modern world, there are two types of debt: good bad and bad debt. Good debt would be considered financing something that has the potential to go up in value, like a home or a small business. Bad debt would be considered consumer debt like jewelry, designer clothes, and luxury cars. These things tend to depreciate. People typically get into trouble financially when they start going into debt with consumer goods or things they really don’t need.
1.) Create a budget
Unless you are already financially well-off, you are going to need to create a budget for you and your family. This is the single biggest way not to go into debt. Why? Because you are tracking every dollar you spend. Start out by listing your monthly income after taxes at the top of the budget, then list your expenses below that. If you don’t have a surplus of money after all your expenses are accounted for, you are either spending too much money or you are not making enough money. Whatever the case may be, adjust your budget accordingly.
2.) Quickbooks
The Quickbooks online platform by Intuit is probably one of the best online financial tools you can use for your business. In general, it is an online accounting software that helps manage your finances for you. With an easy Quickbooks online payment, you can pay people and you can receive money too. In the end, business finances can get pretty confusing. Quickbooks allows you to track your finances more easily. Also, Intuit has a budgeting app called Mint. I use Mint quite often and it tracks all my transactions and spending activity. It also tracks your budgets, monthly cash flow, and your credit score along with many other investments and other accounts.
3.) Emergency fund
Let’s face the fact that bad things happen to good people. When these setbacks occur, people need money set aside to protect themselves from debt. This is what an emergency fund can do. First, start by putting away a simple $1,000 just in case an emergency happens. Your next goal should be to save up three to six months of living expenses. This will take a bit longer than the initial $1,000 but it will be well worth it. Think of this fund as insurance for emergencies. The more you save, the better off you will be when something bad does happen. Like they say, a crisis becomes an inconvenience when money is set aside.
4.) Stop impulse spending
Impulse spending is one of the biggest reasons why we have so much credit-card debt in North America. People tend to by designer clothes, luxury watches, and nice cars by financing them. As I said earlier, you should only go into debt on things that will or have the potential to go up in value. If you are a habitual impulse spender, find somewhere in the budget where you can accommodate for this or find ways to overcome it. If you can’t, you must gain financial discipline. In the end, you want to have as much money left over at the end of the month as you possibly can. Later, you can put this money to work.
5.) Increase income
As all the great entrepreneurs will say, “Income is king.” When they say that, they definitely aren’t wrong. Increasing your top line is very important when you don’t want to go into debt. When you increase your income, you can allocate that extra money towards other parts of your finances. You can fill up your emergency fund faster or maybe you can invest that money into certain assets. The good news is that increasing your income is simple. You can pick up an extra job waiting tables or delivering pizzas, start a side hustle such as something online, or start a small business with limited capital. In the end, income is king and you must optimize it to stay out of debt.
Overall, if you take the proper precautions, staying out of debt is quite simple. Creating a budget, using proper software, keeping emergency funds, refraining from impulse buying, and increasing income are surefire ways to ensure your finances are secure and you stay debt free.
Gary Bordeaux is a real estate professional and company owner based in Portland, Maine. As a retired real estate agent, he spends his time and energy investing, and writing about what he has learned. His goal is to help entrepreneurs and small business owners achieve their full potential.
