There are consequences of spending more than you make and it can become very overwhelming. Eventually you will have too much debt to live and most likely become very depressed and/or riddled with anxiety. Luckily there are ways to get out of that black hole we call debt.
To start you need to figure out what got you into this mess in the first place, so that you can change the pattern. For most it boils down to bad spending habits, if you are wondering what would be considered bad habits, here are some examples of bad spending habits:
Spending more money than you make: Most would think they can’t do this, it would be impossible to spend more than you make…right?🤔Nope, you can make $1,000 per month but actually be spending $1,200. Borrowing money from family and friends, dipping into savings, going into overdraft on your account, or credit cards. Any of those options will eventually result in more and more debt.
Using credit cards: Having credit is a good thing, but only if you are very responsible with money and make a consistent income. Using credit cards for everyday purchases often leaves people in crippling debt. They are spending a little bit here and there, not thinking it is very much. These small purchases add up and then interest starts to accumulate and next thing you are drowning in debt.
Shopping addiction: You would be surprised how many people suffer from this, you might and not even know! If you find yourself impulse buying or purchasing “things” just because you are having a bad day you may fall into this category. This is especially a problem if you hide your spending and debts from your partner. Huge red flag that you may need to evaluate your spending habits.
Using debt to pay off debt: You can probably figure out why this is a bad idea, we all know it is but sometimes we feel we have no other choice. One debt collector could be hounding you and your family (yes I have had debt collectors harass my parents long ago😣) so to make them stop you take out another loan, payday loan or borrow money to pay it off. However, you are still in debt and just postponing the inevitable.
Those are just a few examples.
Now the key to stopping any bad spending habits is to change your lifestyle and start a budget! A great way of living to consider is the frugal lifestyle and/orminimalist living. Either of those will help you save money and actually improve your mindset thus making you happier.😍
First off you will never have too much debt to live, there are always options to getting out. Even if you have no income you would still have the option to claim bankruptcy. Before you go down that rabbit hole🐰 let’s discuss ways to getting out of debt and living a debt free life!🤗
Create a budget, I cannot stress this enough! You NEED to know how much money you have coming in vs going out AND where exactly it is going. Here are some resources you can check out to help you create a budget:
5 Things you need to know before budgeting
How to budget if you suck at saving
Step two: Debt
If you are reading this post then I am assuming you are drowning in debt, so first off you need to face reality and realize your life may not be the “funnest” over the next while. You need to focus on getting your debts paid off, so any extra income should ALL go towards your lowest debts first. To help you can follow my8 Simple Steps to Getting out of Debt.
Step three: Make Money
Making more money to put towards your debt will speed up the process and keep you motivated. I always suggest paying the minimum payments on all debts, but then put all your extra money on the smallest debt to get it gone fast, then keep moving up the list. I have a ton of resources for ways to make extra money on the side, remember this extra money is not to be included in your budget since it is highly unreliable.
Work from home jobs that don’t cost money
Best side hustles anyone can do
How to make extra money on the side
5 Apps that pay you cash
Step four: Savings
You will eventually want to start a savings to prevent yourself from getting into debt again. You never know when something unexpected will happen and anything has the potential to put you back in debt. You should also consider an Emergency fund before you start a savings fund.
Best ways to save money
I hope this helps you get out of debt or at least jump starts your motivation.
Here are some tell-tale examples that your debts have climbed too high: Your consumer debts (credit cards, medical bills, personal loans) total half or more of your income. Creditors are calling to collect payments. You're making only minimum payments on monthly credit card bills.
Most lenders say a DTI of 36% is acceptable, but they want to lend you money, so they're willing to cut some slack. Many financial advisors say a DTI higher than 35% means you have too much debt. Others stretch the boundaries up to the 49% mark.
High-interest credit card debt can devastate even the most thought-out financial plan. U.S. consumers carry $6,501 in credit card debt on average, according to Experian data, but if your balance is much higher—say, $20,000 or beyond—you may feel hopeless.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt.
Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%. Any debt-to-income ratio above 43% is considered to be too much debt.
There's no specific definition of “a lot of debt” — $10,000 might be a high amount of debt to one person, for example, but a very manageable debt for someone else. Calculating your debt-to-income (DTI) ratio gives you a rough idea.
Personal debt can be considered to be unmanageable when the level of required repayments cannot be met through normal income streams. This would usually occur over a sustained period of time, causing overall debt levels to increase to a level beyond which somebody is able to pay.
Jul 26, 2024, 7:36 AM PDT. Getty; BI. Money dysmorphia is a negative or unrealistic perception of one's financial wellness. A financial therapist says millennials and Gen Zers are more prone to experiencing money dysmorphia.
Lenders like to see debt-to-income ratios lower than 36% when considering applications for loans, so it's a good benchmark to use when looking at your budget, although "the lower, the better," says Tim Melia, a CFP with Embolden Financial Planning.
To escape a debt trap, focus on budgeting, prioritize debt payments, consider consolidation or negotiation, and avoid accruing more debt through responsible financial management.
Having too much debt, particularly bad debt, suggests that you may be living beyond your means. This can make you seem like a riskier borrower in the eyes of lenders, as this makes you more likely to default than someone with a lower debt load.
By calculating the ratio between your income and your debts, you get your “debt ratio.” This is something the banks are very interested in. A debt ratio below 30% is excellent. Above 40% is critical. Lenders could deny you a loan.
Most creditors report your accounts and payments to the credit bureaus. You can check all of your debts for free by reviewing your free credit report from Experian. You can also get a free credit report from each of the three major credit bureaus (Experian, TransUnion and Equifax) by visiting AnnualCreditReport.com.
Introduction: My name is Stevie Stamm, I am a colorful, sparkling, splendid, vast, open, hilarious, tender person who loves writing and wants to share my knowledge and understanding with you.
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