How To Stay Out Of Debt
In order to stay out of debt, you’ll need a contingency plan. Include: - An emergency fund – which you try to never, ever spend (only in case of severe emergencies). - A “for sure” savings – for your occasional large expenses (e. repairs, Christmas, taxes, etc). - A “buy stuff” savings – just to buy things that cost more than your monthly disposable income.
- An overdraft protection line of credit to protect you from returned check fees. Don’t use it for anything other than to avoid bouncing checks. - An “empty” credit card (one that you rarely if ever use – keep it only for emergencies – zero balance, zero interest). Get into the habit of paying off your credit cards each month to avoid interest charges. The greater the rate, the higher the risk.
Get a safe return on at least part of your savings. Don’t co-sign on others’ loans. They may intend to pay, but you may actually pay. Too often, co-signers end up paying off loans they are unprepared for, and financial hardships follow. Numerous co-signors now have negative credit ratings because a primary borrower paid late. Many lenders do not notify the co-signor before reporting delinquencies or repossessions to the credit bureau. Nothing is risk-free. If anyone claims a risk-free use of your money, they are lying, or they just don’t understand that there is always risk involved – if only opportunity risk. Remember, when you borrow you are still spending future earnings, and eliminating future options. When you borrow, even at low rates you are still paying to use someone else’s money.
The tax advantage of keeping a mortgage loan: You pay me $10,000 this year, and I’ll get my Uncle Sam to let you deduct $2,000 from your taxes next year (if you are in the average tax bracket of 20%).