In the previous post I talked about the problems I have with some of the advice given by the big financial freedom gurus. So, what’s the bottom line to getting out of debt and staying out of debt? The number one way to stay out of financial trouble is to live within your means. Clearly, if you don’t spend more than you make, you’ll be able to keep debt problems from taking over your life.
This also means that you shouldn’t buy things on credit if you can help it. Don’t purchase anything with a credit card that you aren’t fully intending to pay off by the end of the month. I’ve heard from some that say it’s okay to make a purchase as long as you can pay it off in 3 months or some other finite time span, but that could be getting you into dangerous territory if something unexpected happens. If you need to pay for medical bills or an emergency car repair during that time, you could have trouble paying for it.
Of course, people have to have a place to live and few can afford to buy a house with cash, so a mortgage is most often a necessity if you want to own a home. The conventional wisdom used to be to buy as much house as you could afford. In this day and age of easy credit, this is insane. With the easy credit often comes terms that will eat you alive financially if you are late or miss a payment. Beware of stretching to buy a house that you really can’t afford.
If you’re going to make a budget, make it realistic. Many people start with the rather rosy budgets you can find in the gurus’ books. You have to look at your own finances, though, and decide right away what kind of lifestyle you’re willing to live. If you can’t afford that car payment, sell the car and buy a beater (as Dave Ramsey says). If you can’t afford that house, downsize.
Don’t assume you’ll be making more money in the future. This is a huge mistake that many people make. When you start off with this assumption, it’s possible to make all kinds of terrible financial decisions. When you make your choices, assume that at best, everything will stay the same or cost more. That’s the safest way to ensure that you don’t get your rear end handed to you a year or two after buying that big fancy house in the suburbs.
When the mortgage broker puts a contract in front of you for that interest-only or ARM note that’s so popular these days, think twice. Better still, walk away and think about it. Distance yourself from the idea of having big, nice things and think about what your daily life is really going to be like under the stress of paying for all those great things. Won’t life be better if you have at least a few hundred dollars extra each month?
While these tips may not be for everyone, many can benefit by starting with the golden rule of personal finance: Live Within Your Means. If you’re in a serious financial situation, think hard before getting into new commitments. It’s still possible to live a pretty good life even if you’re willing to accept a little lower quality home and car rather than the best that the bank’s money can buy.