You know that there are some bad habits that can put you into debt. But did you know that there are lots of habits that will get you out of it?
Learn the twelve essential habits that will help you achieve debt-free living and financial freedom.
1. Follow a Budget
The first step to financial freedom starts with a budget. A personal budget will help you understand your financial situation. It reveals how much you’re making, how much you’re spending and how much you should be saving.
If you have a romantic partner or roommate, you should think about going beyond a personal budget and start a household budget instead. Including everyone’s income and expenses will be much more helpful.
To get started, you can download a budgeting app or fill out an Excel spreadsheet with calculations on your income, expenses and savings goals. If you need help, take a look at the budgeting section on our website.
At David Sklar & Associates, we’ve put together a step-by-step guide to help you make a strong budget.
2. Track Your Spending
Sometimes, it feels like your money disappears into thin air. Where did it all go?
If you want to be debt-free, you should get in the habit of tracking your spending on a regular basis. Doing this will let you know exactly where your money is going and help you determine whether those expenses were necessary. For instance, you could realize that you’re paying for several entertainment subscriptions that you don’t use anymore. You could save so much if you just cancelled those subscriptions.
Tracking your spending also helps you figure out if you’re sticking to the guidelines of your budget. You need proof that you’re following the rules that you set.
3. Pay Your Bills On-Time
Missing bills comes with consequences, and those consequences add up. You can rack up late fees and penalties. In some cases, your services might get cut off — which often means that you have to pay to get them turned back on.
Stop making this expensive mistake. Pay all of your bills on-time. If you’re having trouble remembering the deadlines, you can use bill monitoring apps or calendar apps to send you reminders on your smartphone/tablet/computer.
4. Don’t Depend on Credit
Using your credit card to pay for everything is a bad habit that you should break. Credit is borrowed money. While it’s under your name, it’s not technically yours — you’re expected to pay it back with interest. Every time you make a purchase with plastic, you’re not actually paying the fee. You’re giving yourself debt to deal with later on.
This habit comes with big risks. You could quickly rack up your credit card balance with small, everyday transactions. The higher balance will be hard to manage and pay down. It will grow faster. If you’re not careful, the balance will reach its limits, and you’ll max out the card.
To avoid this problem, you should think about separating your purchases based on the best payment method. Simple everyday items like groceries, toiletries and coffee should be covered by cash or your debit card. Important bills and online shopping purchases can be put on the credit card. Lessening the load on your card will help you maintain a low balance, preventing you from sliding into serious debt.
You can also keep your number of credit cards to a minimum. You don’t need a wallet full of them. Spreading your debt across multiple cards with different balances will complicate your personal finances and turn your debt management into a stressful juggling act. It’s better to keep it simple and stick to one or two cards.
One of the other reasons why you should break this habit is that credit makes it easier to spend blindly. Unless you have a mobile banking app open, you won’t see how much is on your balance before and after the transaction. You don’t get a sense that you’ve lost funds when you swipe a card.
This is why paying with cash is a good idea when you’re trying to spend less and save more. According to experts, people experience the pain of paying with paper bills because it’s tangible. You take the bills out of your wallet and hand them over. You notice that your wallet is lighter than before. Debit and credit don’t inspire the same feelings.
It might be harder to use cash right now since some businesses are worried about COVID-19 transmission through cash because the virus can stick to surfaces. If you can’t use cash because of this reasoning, you should use your debit card instead.
5. Pay More Than the Minimum
One habit that will help you achieve debt-free living is paying more than the minimum for your credit card bills. Credit card minimums let you pay off a small fraction of your balance in order to avoid a missed payment.
This helps you avoid racking up a late fee, and it protects your credit score. As you could see from earlier, missing out on bill payments will lower your credit score and make you look like more of a lending risk.
While paying the minimum isn’t bad, it’s not very useful beyond avoiding penalties. Paying $20-$25 every month won’t do much to shave down the balance, and it certainly won’t contend with the interest rate. It would take you years to tackle your entire credit card balance using only minimum payments — and that’s if you didn’t put any more transactions onto it.
So, get into the habit of paying more than the minimum. Try to repay as much of your balance as you can.
6. Practice Mindful Shopping
The way that you shop can affect your financial freedom. When you shop impulsively, you don’t think about the number on the price-tag or even whether you need the item — you just buy it. This makes it easy to overstep the boundaries of your budget and dive into debt.
When you practice mindful shopping, you ignore that impulse to spend right away and try your best to make the savviest decision. You ask yourself whether you can afford it right now, whether you can find a better price somewhere else or whether you need the item at all. It’s a conscious effort to stop yourself from consuming for the sake of consumption. By practicing this habit, you’ll cut down on frivolous spending.
It’s important to know that there is a big difference between impulsive shopping and compulsive shopping — one is a bad financial habit, and the other is a form of addictive behaviour. If you relate to the description of a compulsive shopper, you should seek out professional help.
7. Start an Emergency Savings Fund
An emergency savings fund is a safety net that will catch you whenever you fall. So, if you suddenly have car trouble or an appliance breaks down, you can dip into this savings fund and get it taken care of. You don’t have to feel pressured to put the expense on your credit card or take out a high-interest loan in order to resolve an emergency as soon as possible.
Over time, you can build up the fund so that it has enough to support you through major emergencies and upheavals. If you get sick or lose your job, you can use this account instead of jumping directly into debt. Having direct access to a financial back-up plan will help you maintain your financial freedom, even at the worst of times.
8. Check Interest Rates
Checking the interest rates before agreeing to any credit arrangement is always a good idea. It will help you figure out whether it’s smart to accept the loan. A steep interest rate will make your repayments balloon quickly. It’s a common problem with payday loans. It’s also a problem with rental furniture operations — take a look at our article that asks whether renting and leasing actually save you money for proof.
Knowing the interest rates of your current credit contracts is also a good idea. It will help you determine what debts you should prioritize for repayments. A higher interest rate carries more risk, so you should give it priority over debt with low-interest rates. For instance, you should pay off a credit card more than a standard line of credit — these typically have lower interest rates (3-5%).
9. Learn about Finances
If you don’t want to be caught by surprise by account fees, interest rates and other details that can pull you into debt, you should make a habit of doing research. Knowledge is power.
How do you start? You can explore our blog and find informative articles covering different financial topics. By reading these articles, you can learn everything from how to recover from an unresolved R9 credit rating to how to file for personal bankruptcy.
You should also do some digging into your bank accounts, loans and other financial agreements. You might be surprised by what you skimmed over when you first signed the contract. Most importantly, don’t be afraid to ask questions. There’s no need to be shy!
10. Tackle the Balance
A high balance on your credit card is tricky for a lot of reasons: it’s harder to pay off; it leaves you less credit to use during emergencies; it raises your risk of maxing out the card, and it hurts your credit score. One habit that you should get into is tackling as much of the balance as you can afford. If you can’t pay it off entirely, try to get the balance below the halfway point. It will be much more manageable — and it won’t influence your credit score.
11. Find Budget-Friendly Alternatives
Saving money doesn’t always have to about sacrifice. You don’t have to cut out everything that you like doing for the sake of saving. The trick is to replace some of your expenses with budget-friendly alternatives. Here are just some ways that you can trim costs without sacrificing your enjoyment:
- Instead of regularly ordering takeout and delivery, find out how to cook fast food favourites like pizza or curly fries and buy groceries using some helpful grocery saving hacks.
- Buy coffee beans/grounds and learn how to brew your own coffee and espresso drinks so that you stop giving the neighbourhood Starbucks money every day.
- Take advantage of free streaming services instead of paying high subscription fees every month.
- Use the library to read the latest books instead of buying them. The Toronto Public Library also offers ebooks and audiobooks.
Make a habit of finding affordable alternatives to your monthly expenses. That way, you can still have fun without breaking your budget and getting into debt.
12. Ask for Help
One of the most important habits that you should follow is reaching out when you need help managing your debt or personal finances. There’s no reason why you should go through this alone.
Whether you’re struggling with debt repayments or you’re having trouble sticking to these financial tips, you should come to David Sklar & Associates to get some professional guidance. Our licensed insolvency trustees can assess your situation and help you figure out how to achieve financial stability. Whenever you need a hand, give us a call.
You can also find more on our website and blog. You’re sure to find something that makes your journey to financial freedom smoother.
David Sklar & Associates:
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next.
If you need financial help, we are still here for you. We offer over-the-phone consultations and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.
You have the power to break bad financial habits and live a better life. If you need more motivation and guidance to go forward, you should talk to our licensed insolvency trustees. We are in your corner, rooting for you to succeed.