How to Avoid Falling into Debt
First, there is a golden rule in finance to never spend more than what you’re making. Always monitor your expenses and earnings in a balance way. Personal accounting can be quite tedious yet there is always special software or special consultants to help you with your financial goals. Keep in mind the debt-to-equity ratio, which means that your amount of debt/liabilities cannot exceed the assets/equity you own. Wait until you have built sufficient equity-collateral before you consider taking on big loans for a home, business or that fancy car. Essentially, your income level would have to be high enough to accommodate for your lifestyle choices. Don’t trust the “fast cash” schemes as many of them charge astronomical interest rates that can make you fall deeper into debt. Whenever you can, always try to use professional opinion from a credible/knowledgeable source. Deal only with reputable firms that would not shaft you and your finances. Do your due diligence and become knowledgeable about how to manage your finances yourself. It also helps to know your consumer rights when it comes to dealing with credit and loans… Try to invest only in those securities that provide a positive yield on your investment. Before you calculate the marginal gains, you need understand the economic concepts of marginal propensity. These are special laws of tendency that sway you into either high or low financial risks. A golden rule is to minimize the risk while maximizing the pay-off returns. You can also invest in non-risky commodities or certain ventures that you wish to launch for which you absolutely know there is going to be a high demand.
If you’re a student, make sure you’re proactively resourceful in how you obtain your financing. Get as much as possible from scholarships, grants and family college funds. This will drastically reduce the amount of loans you have to take on. It’s been said the interest rates from some of those loans encumbered many students to declare bankruptcy. Choosing a profession like a Medical Doctor can make you rack up too much student debt too fast. So be prepared for what comes with the territory. It’s been said that luck happens when preparation meets opportunity.
If you’re a homeowner, always have a short-term AND a long-term plan on how you’d be financing your housing. Buying when home prices are low and selling when the home value is still high would be a smart move. This is where income leverage plays a major role. In addition to securing your financial independence, you’d have to think about those terms that you’d be negotiating with the bank or your landlord or any co-paying party. Always have a sufficient savings cushion in the bank in case there comes a dark day when you need to tap into your ‘reserves’. This includes things like unemployment or sudden medical expenses…
For those who like living the high life, be modest about your spendings without flaunting nor competing with others for status; it’s always much easier to spend money than to earn it. Living lavishly when you cannot afford it is among the easiest ways to go bankrupt. Living with a spouse, roommates or parents can significantly reduce your chances of taking financial risks that can lead to a zero balance in the bank. This is called financial leverage.
And for goodness sake, don’t ever get too many credit cards; it may create an illusion of having lots of extra money but that’s not really the case. The credit card balance acts like a small loan that you have to pay off. Keep your credit score at a higher level to avoid bigger interest rates and ALWAYS pay off everything on time! Yuri Sire – Content Manager / Blogger