Don't spend more money than earned and don't use credit cards as a means to supplement your income. Before purchasing an item, decide if you really need that item and will that item improve your quality of living (i.e. increase your happiness, make you feel better, improve yourself, or benefit you). If not, then don't buy the item. Instead use the money to pay off an existing debt or start a savings and investment plan. Spending less money than earned also allows the opportunity for you to prepare for the possibility of future monetary problems and/or retirement. If more money is spent than earned, consider using the money existing in a saving account as a loan to yourself. In the following months, repay the loan to yourself (the savings account).

     When unexpected expenses occur, using the money in a savings account is a better alternative as a means of payment for your debt than paying the credit card company interest. Would you rather loose less than 3% interest earnings from a savings account or pay over 12% interest to a credit card? I'd rather lose the 3%, but I see many people opt for the 12% loss! Also realize, the interest earned from the savings account is taxable which reduces the overall interest return causing an even greater loss. A 3% interest rate actually becomes 2.49% after taxes for an individual in the 27% tax bracket while the interest paid to a credit card company is not tax deductible.

     A secret for preventing a large amount of debt is to live below your means of income allowing yourself the opportunity to build an emergency/reserve fund consisting of several months' income to be kept in an easily accessible savings medium, i.e. bank savings and CD accounts. Whenever a large, unexpected expenditure occurs, relax; use your emergency/reserve fund instead of using your credit cards. Afterwards, build your emergency fund back to its original amount. Don't try to keep up with the Jones'!


Return to Debt Management Topics.