Debt is a serious problem in the United States. The average American has $38,000 in personal debt. That excludes home mortgages, which means that amount is much higher for home owners.
It’s nearly impossible to make it to adulthood without at least a little debt, but paying it off can set you back years, or even decades when it comes to meeting your financial goals. Paying back all that debt means paying it back with interest, which makes building wealth nearly impossible.
There are some instances when taking on debt is a must, but if you really want to get ahead financially, you have to do your best to prevent the accumulation of debt in the first place.
In This Post:
Understand and Prepare for Taxes
Tax time is a nightmare for many Americans. That’s because many people don’t know exactly what to expect. That can work out in your favor, if you find out you’re getting a refund, but the opposite is also a possibility.
It’s important to understand taxation in the state where you live. You should also keep an eye open for changes in tax law, as well as personal circumstances that can affect your taxes. That way, you can plan ahead.
It’s better to save a little money aside in an account to make sure you aren’t stuck making tax payments. Uncle Sam charges interest, which means you’ll end up paying back more than you owe if you don’t plan ahead for your tax situation.
Create an Emergency Savings Fund
There are a lot of things to save for, and there are a lot of tips out there on how to save more money. But, before you start saving for your dream vacation or a down payment on a home, you should build an emergency fund.
Having an emergency fund means you won’t have to go into debt if you are faced with a surprise financial challenge. For example, a car repair won’t require you to use a credit card when you have an emergency savings fund.
Start with a goal of $1,000, but your ultimate goal would be to save enough to cover at least six months’ worth of expenses.
Use Credit Cards the Right Way, or Don’t Use Them at All
Credit cards offer a lot of great benefits. Unfortunately, they can also be a little too tempting, and before you know it, you’re paying an outrageous interest rate on a card that has thousands of dollars of charges.
Knowing how to use credit cards is important. For example:
- Choose cards with benefits that you'll actually use
- Make charges that will maximize cash back
- Know when rewards points and benefits expire
- Run spending through the card or cards with the best benefits
The key to success is paying off your card at the end of every month. If you’re too tempted to spend above your budget, skip using the cards altogether.
Invest in the Right Kind of Higher Education
Higher education is the gateway to higher pay. Those who are college educated have more opportunities than those who don’t, but increasingly, higher education doesn’t necessarily mean higher pay.
Some careers that require a college education pay better than other careers, but if you have to go into extreme debt to get that diploma, it won’t pay off.
Likewise, there are some careers that are more lucrative than others. For example, a career in computer science or mathematics makes taking on debt more manageable than a degree in philosophy or art.
Only opt to go back to school if you’re choosing a well-paying career that will make taking out loans worth it.
Keep Lifestyle Creep in Check
Lifestyle creep is the biggest roadblock to building true wealth. Lifestyle creep is when you make more money, but your standard of living increases too.
In some ways, this is a good thing. For a struggling college student, it means buying new shoes when you need them instead of wearing worn out shoes because you can’t afford a new pair. However, if regular manicures, name brand items from the grocery store, and a more expensive house become the norm, you could find yourself in serious trouble if you lose your job or your income decreases.
We all want to find ways to build more wealth. That means saving and investing, but it also means avoiding debt that comes with steep interest rates. With the tips on this list, you can keep your debt in check so your personal wealth can grow exponentially.