Debt. More than one in three Americans have it.
Debt can come in various forms: credit cards, medical expenses, mortgages, student loans, cellphone contracts and even a past-due gym membership. When these unpaid bills are reported to collection agencies, they can potentially damage one’s credit score or ability to get a job.
According to Bankrate.com, some of the main causes of debt are related to poor money management, saving too little or none at all, and a complete misunderstanding of how money works. Rather than falling into the same financial rut month-after-month and wondering how you’re going to get help with your debt, let’s take a look at some healthy financial habits of debt-free Americans.
They Build an Emergency Fund
If you have ever heard the expression “save it for a rainy day” this is exactly what your emergency fund is for. Many financial experts agree that you should maintain a cash reserve that equals AT LEAST three months’ worth of your general living expenses (rent/mortgage, food, utilities, etc.), and up to six months of reserves to truly be safe.
The emergency fund of three to six months may very well appear to be a significant number, however it is necessary for the uncertainties life throws at us. To learn more about the how’s and why’s of building an emergency fund, check out this article by Investopedia to learn how to put a plan into action.
They Only use 20% or Less of Available Credit Limits
Savvy consumers who remain debt-free do so because they keep their debt in check and also know how to improve their credit scores. In the credit world, there is a term called “Credit utilization ratio” that compares the amount of credit you use to the total amount available. Having a ratio of 20 percent or below is considered to be a good practice for helping you improve your credit score.
They Only use Their Credit Cards for Purchases They Have Cash for
As obvious as it may seem, many people accumulate debt because they make purchases, on credit, for items they simply can’t afford. Credit is a good thing because it allows you to make larger, significant purchases down the road (such as a home). However, exceeding the amount of credit card debt you accumulate compared to your income results in a perpetual cycle of trying to catchup and usually results in more debt. Smart consumers get in the habit of only buying things on credit when they have the cash to pay for it just to keep credit revolving.
They’re Patient and Mature with Money
How often do we buy things that we truly do not need? Sure, we all need a roof over our heads and food, but do we really need the newest flat-screen TV or pair of shoes? Debt often thrives off of impulsive, unnecessary material purchases that can be avoided. Being mature with your money means that you understand the purchases that will put you into debt and those that will help make your future brighter.
They Have a Financial Budget
People who are debt-free have a firm grasp of all their expenses and income. Writing down these two items is the first step to understanding where your money is going and where you can cut back to help you better allocate funds to get out of debt. It is also important to understand when you get paid and also the days you get billed so you’ll know the exact times of month you’ll need a certain amount of funds in your account(s).
Author Byline: “Debthelper.com is an IRS Approved 501c3 Non-Profit Florida Corporation dedicated to our mission to educate, advise and empower youth to seniors to handle debt, credit and housing and to provide affordable housing opportunities through the acquisition and rehabilitation of residential properties.”