Cleanse yourself of toxic debt
Toxic debt is poison. It constricts your financial wellbeing by burdening you with interest payments, fees, and dependence on further debt. Toxic debt also prevents you from investing and achieving financial independence.
For most consumers, their debt is working against them. They have toxic debt that only takes and doesn't give.
Even if you understand this, it still may be hard to stop using your credit card. When you want something you cannot afford, it's easy to think, "I'll just put it on the card."
You may be "living large" now, while you are racking up debt. You may be keeping up with your friends, family and neighbors. But they may be spending beyond their means too, and you could all be quietly sliding down the road to ruin together.
In any case, if you keep up your current level of debt, you will not have enough money left over to invest in your future and create financial independence for yourself.
Learn about "positive debt"
Debt can either work for you or against you. Some kinds of debt can work for you. If a debt is increasing your cash flow, it is called "positive" debt.
One suggestion is to use a low-interest rate loan to pay off high-interest debt. Here's one example: Say you have a large debt on a credit card that charges you 18% interest. If you could get a loan from the bank at, say, 8% interest and pay the credit card off, you would have automatically saved yourself 10% in interest payments. This could be a significant savings.
Here's another example: Say you have $10,000 in the bank earning 3% interest. You also have a loan for a car, on which you are paying 6% interest. It makes sense to take money that is giving you 3% and use it to pay off a loan that is costing you 6%.
In other words, if you have debt or a loan at a higher interest rate and you can get another loan at a lower interest rate, you can pay off the higher rate loan with the lower rate loan. Or you can use a loan at a lower interest rate to buy something that earns you a higher interest rate. Either way, you can save large amounts of money in interest payments that you didn't have to pay.
Protect your credit rating
You may be handling those "easy, low, minimum payments" every month. But what if something happened in your life that made it difficult to make those payments? What if you lost your job, got injured, sick, or divorced? What if the interest rate on the credit card was increased?
If you are late on your payment, the credit card company has the right to "dial down" your credit rating. This is very serious. A low credit rating, also known as your credit score, could prevent you from getting a loan or buying a home.
Avoid debit cards
Debit cards make you lose control over your bank account. If you and your spouse/significant other withdraw from the same bank account throughout the day, you easily could become overdrawn and bounce checks all over town. It may be better to have separate accounts or mutually decide before each purchase.
Control your saving
Formulate a realistic plan to save, even if it's just a few dollars a month. Starting out small is okay. The goal is to develop the habit of saving. Gradually increase the amount you save. Most people should be saving at least 10% of each paycheck for an "emergency" fund.
The larger the savings, the larger the results. Strategic, disciplined savings can have enormous, long-term benefits.
Heidi Clingen is a long-time resident of Stevenson Ranch. She and Samuel K. Freshman are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com
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