8 Essential Tips for Managing Your Finances and Avoiding Debt

Managing your finances effectively is crucial to achieving financial stability and avoiding unnecessary debt. Here are eight essential tips to help you stay on top of your finances and make informed decisions about borrowing and spending.

1. Build an Emergency Fund

The top way to prevent debt is to have an emergency fund you can rely on to cover unexpected expenses. When you have cash stored away for surprise car repairs or medical bills, you won’t need to use a credit card to cover them. Experts recommend saving three to six months’ worth of basic expenses in your emergency fund. However, starting with a smaller, more manageable savings goal, such as $500, can make a significant difference.

2. Create a Budget and Stick to It

Credit card debt can sneak up on you if you’re regularly making purchases you can’t pay off each month. The best way to avoid overspending is to make a plan for each dollar you earn, otherwise known as a budget. Choose a budgeting plan that works for you, such as the 50/30/20 plan or the multiple-account plan. Tracking expenses and ensuring you’re spending less than you earn will help you avoid falling into debt.

3. Develop a Savings Habit

Making automatic transfers from your checking to savings accounts will help you build up savings quickly. When you separate that money from your checking account, you’re less likely to spend it and potentially go into debt. Automate savings for your emergency fund, retirement fund, and college savings fund. Aim to save about 20% of your after-tax income for savings and debt repayment combined.

4. Keep Track of Your Bills

By setting up calendar alerts and bill reminders to pay credit card and loan bills on time, you’ll avoid late fees and increased interest charges. Missing a payment can result in a drop in your credit score, making it harder to qualify for the lowest rates on credit products in the future.

5. Pay Your Credit Card Bill in Full Each Month

Credit cards make it easy to buy big-ticket items that you can’t immediately afford. However, one of the best ways to avoid debt is to treat your credit card like a debit card: only buy items you know you’ll have enough money in your checking account to cover by the time your bill is due. This way, you’ll never pay interest, and your credit utilization will stay low, potentially strengthening your credit score.

6. Only Borrow What You Need

When seeking a car loan, mortgage, student loan, or personal loan, opt for the smallest one possible that will help you meet your goals. Making a sizable down payment on a car or mortgage can lower your ongoing monthly payment. Consider borrowing through a credit union for potentially lower interest rates on loan products.

7. Maintain a Good Credit Score

Debt may be unavoidable for major expenses like buying a house, going to college, or buying a car. However, you can limit your monthly payments and get a lower interest rate with a good credit score, generally considered 700 or above. Keeping debt balances low, paying all bills on time, and limiting the amount of new credit you apply for are key to building good credit.

8. Use Caution With Buy Now, Pay Later Plans

Buy now, pay later (BNPL) plans let you pay off a purchase in smaller, fixed payments over time. While BNPL plans may offer 0% interest and have less stringent approval requirements than credit cards, they can lead to debt if not managed carefully. Each BNPL purchase comes with its own agreement, making it crucial to keep track of multiple new due dates if you already have other BNPL purchases, loans, or credit cards to pay off.

How to Pay Off Debt

If you find yourself in debt, first check your credit report to understand the extent of your debt. Consider these ways to pay it off:

• Consolidate debt using a balance transfer credit card or debt consolidation loan.
• Pay more than the minimum each month using the debt snowball or debt avalanche repayment method.
• Work with a nonprofit credit counselor to build a budget that will help you get rid of debt and, if it works for you, pay down credit card debt using a debt management plan.

It’s important to find a strategy that works for you and your unique financial situation. Consistent progress over time is movement in the right direction, even if you’re not able to reach your goal of paying down your debt overnight.

The Bottom Line

Debt doesn’t have to be the enemy, especially if you use it strategically and ensure it won’t overwhelm your budget. It’s possible to make use of financial products that can get you rewards and grow your credit, yet still stay out of debt. Stick to your spending plan and pay off monthly credit card balances in full, and you’ll have taken the first and potentially most important steps toward lasting debt freedom.

For any mortgage service needs, contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you achieve your financial goals and secure the best mortgage options available.