Financial freedom is something we're all striving toward.
But, you're reading this because you need help to change habits that lead to debt.
Lucky for you, if you follow these five tips to the letter, you'll become financially free and independent.
You'll eventually become so well-versed in financial literacy that your friends and family will look to you for your financial knowledge.
In modern society, debt is a way of life.
Even if you somehow manage to stay out of debt your entire life, its absence will show up on your credit report, creating financial problems down the road.
Our financial well-being may well depend on the quality of the financial education we've received as young adults. In other words, the future economic security of our country will depend on what we teach our young people.
Unfortunately, some of us haven't had the same financial literacy training that others have had. It isn't fair and results in a lack of financial goals, proper money management, and extremely poor financial decisions.
Yet, taking on debt is many times required for a lot of activities, including starting a business, going to college or buying a house.
People forget that with credit, the risk of falling into debt increases significantly. Regardless of this, credit can be an ally when utilized carefully, as it aids your credit score, and may offer miscellaneous benefits, such as rewards in the form of cash or air miles.
Here are five tips that will help you use your credit cards and other lines of credit to your advantage, and offer you debt relief in the long run.
1. Use Your Credit Cards Only When You Must
The first tip is quite obvious, but it is very easily forgotten. Too often, people decide to use their credit cards for making purchases that they don't really need.
The best way to avoid this is by making a budget at the beginning of each month, in which you lay out all the costs you will encounter (and those you are likely to encounter), and compare them with your total earnings.
If, after subtracting costs from earnings, you end up with a positive number, then you are good to go. If you end up with a negative number, then you need to reconsider your spending.
Though making a budget may be time-consuming, it will make you more aware of your spending habits. Our desire to spend is psychological, but that doesn't mean it can't be conquered.
The small bursts of joy we feel when spending has not gone unnoticed in the retail industry. Ads and sales target your desire to overspend.
To be blunt, it's you, alone, against a multi-billion dollar industry. Given the fact that these advertisers have many more resources than you have, you can take comfort in the fact that you're still financially alive.
The trick to beating the temptation to spend is taking control of your personal finance habits.
2. Prioritize Debts Before Paying Them Off
If you have more than one debt that you need to pay off, begin the process by deciding which debts should be paid off first. Make a list of your debts, their interest rates, and how long you think it will take you to pay them off.
Use a debt calculator to estimate how much you'd have to pay monthly in order to pay off your debt in time and how much extra you'd be paying in interest.
Money experts recommend using the debt avalanche method, which requires you to start paying off debts with the highest interest rates. Of course, you should still be making the minimum payments to your other debts, but any extra money should go to paying off your highest interest rate.
In fact, it is better if you concentrate on paying one at a time, instead of spreading yourself out too thin. Then, after the highest-rate debt is paid, you can move on to the debt with the second highest-rate, and so on.
Other experts recommend the debt snowball method, which encourages you to pay off the smallest debts first to get the ball rolling.
Both tactics have benefits and drawbacks.
Both are the beginning steps to perfecting your financial capability.
Much of your approach will be determined by your specific situation - How much debt you have, what your interest rates look like, etc.
For example, if your debts all have identical or similar interest rates, it's safe to say that the debt snowball method is right for you.
On the other hand, if you have multiple debts with high interest rates, you should go with the debt avalanche method.
Be sure to make and fill out a financial planning checklist in order to better prioritize your debts and overall finances. Keeping yourself organized isn't only a great way to get your debt under control; it will also help you out when tax season comes around.
3. Always Make Payments a Priority
All payments you make must be made on time, and should never be skipped.
This includes simple things like utility and phone bills, but it is also applicable to credit card payments, student loan payments, and car loans.
Remember that even if the minimum payment is all you are able to make, you should, nevertheless, make it every month. Not doing so will hurt you in a number of ways; including the fact that it will drag down your credit score.
Though it may feel a bit too much like going back to high school, consider taking the National Financial Educators Council financial literacy test.
You'll be able to discover which areas of personal finances you need to work on and the areas in which you are financially literate.
4. Never Go Over 30% of Your Credit Limit
Even if you are always able to make all your payments on time, going over 30% of the total spending limit available to you will decrease your credit score.
Having money in your wallet should not be your only goal; it won't even matter if you can't get a car or home loan all because of a bad credit score.
Remember that this 30% limit applies to all of your credit accounts collectively, not individually. The good thing about this is that it means you don't have to make individual calculations for each one of your credit limits.
5. Negotiating Your Debt the Smart Way
We all hate stress and nothing is more stressful than when your debt is sent to collections. You have the option of negotiating with your lender to settle your debt for less than the actual amount owed, though the process should be handled with care.
You can't go into a debt negotiation without first having a plan or hiring an expert to do it for you.
You must be very careful about this option because it might work against you if you do it incorrectly; there are cases when creditors have sued debtors for money owed.
Make sure that your creditors agree to write 'paid in full' on your account after you've paid the debt. If the lender writes 'settled for less than the balance', your credit score will suffer.
Working with a debt settlement company or debt consolidation company can help you make sure to get everything right. The best debt relief companies have years of experience with the various laws and have built relationships in the industry that can be very helpful for individuals looking to settle their debt.
Credit scores are closely intertwined with your financial situation. If you end up with a low score, then this will most probably result in higher interest rates, meaning that you will be obligated to pay more.
By keeping your credit score high, you are increasing your financial wellness and investing in a healthy financial future. However, if you're a substantial amount behind with your payments, a weakened credit score probably shouldn't be your first priority.