3 Ways to Avoid Indebtedness and Be More Financially Independent

Follow these advices to avoid credit and debt rule your life

Excessive indebtedness is a serious problem in the modern world. People who accumulate debt will wake up one day realizing that the main reason they are working is to pay for consumer goods they already own. At this stage, the person becomes a slave of his goods, has no control over his life and can't make good career choices; credit dictates his life and they can never stop working, even for just a few weeks. It is the paycheck to paycheck syndrome.

Personal indebtedness as well as household indebtedness is in part linked to the fact that consumers are not purchasing goods, but payments, whether by increasing the balance on a credit card or line of credit, or by adding a term loan. Consumers search for ways to fit a payment in their budget, without questioning the total cost and the long term consequences of such a decision. An accumulation of payments forces an individual to maintain a constant flow of income without having any possibility of skipping weekly pay.

Apart from mortgages and a car, there are few reasons to get into debt when making a purchase. Multiple credit cards are a big problem for that matter. Too often, credit cards are changing from a tool to facilitate transaction to a financing tool, which is absurd considering an interest rate at 20% or more! Here are a few tips to gain in financial independence and avoid unnecessary indebtedness:

1. Keep one credit card as a transaction tool

   To begin with, one credit card is more than enough to fulfill your needs. That way, a person keeps a better control of their expenses. Eliminating other credit cards take away the possibility, or should I say the temptation, to increase your debt, since your only card will reach its limit sooner and will force you to pay the balance before using it again. You will therefore keep better control on your spending and put yourself in better position to negotiate good interest rate.

   If you think that one credit card is too little to build a good credit, think again, you can get an excellent credit score with only one credit card with a limit of $500.00 that you pay regularly on time. It is unnecessary to have a collection of cards and increase the risk of getting more debt.

2. Make a cash flow budget after every paycheck

   When receiving your paycheck or cashing any other type of income, anticipate the inevitable payments you are going to make with it until your next paycheck, such as the rent, mortgage, car, energy... By subtracting your regular fix payments from your recent cashed paycheck, you can immediately know the amount you have available for other more volatile purchases, such as groceries, leisure, clothing... This very short term plan is a way to easily know where you stand financially on a daily basis, but moreover, it holds you from blindly using your credit card.

   If you have a mortgage with monthly payments and a paycheck you received every two weeks, it is strongly recommended to synchronize both in order to immediately subtract your most important payment every time you receive a paycheck. You can easily change your monthly payment to half payments every two weeks. Two advantages arise with this approach; first you don't have to think about saving up for your big mortgage payment every month, and second, after a year you make an extra payment on your mortgage without even noticing. You can even do this exercise weekly.

   When knowing exactly the amount left to be used for your more variable expenses until the next paycheck, you will be surprised how easier it is to stay disciplined and spend less than you gain. The goal is not to eliminate your credit card, but to pay the balance in full at the end of the month to avoid transferring continually your balance. This little budget exercise is very simple, so don't hesitate to use a spreadsheet.

3. Save money before buying or take advantage of credit promotions

   The idea of inserting a monthly payment in your budget, whether by increasing the balance on your revolving credit or by getting a term loan, and telling yourself that you can afford it because it is only small payments, is dangerous. You can accumulate purchases that can last on your credit for months, if not years. And if you think you win by minimizing payments, think again, the more you stretch your loan, the more you pay interest, you could end up paying your goods double the original price. Bottom line, purchasing a good with a credit card because of a lack of funds is often a sign that you can't really afford it and it is the beginning of indebtedness.

   Instead of financing on a high interest rate, the ideal solution would be to save before purchasing. However it is not always possible, and thankfully there are ways to go around it. You can exploit credit promotion at 0% and take this time lap to save and pay the total amount only at the end of the promotion, which gives you the possibility of enjoying your purchase while saving for it. In a 0% world, it is more about saving before purchasing instead of using credit. Another way would be to buy it with your credit card and transfer the balance on another credit card presenting promotional rates. The interest rate is not eliminated in this case but remains very reasonable. These are two methods that work, but it is very important to avoid traps and not abuse it, because you can risk being overwhelmed by new debts.

If you are already in heavy debt, follow these three tips and pay your balance with the highest interest rate first and consolidate everything else in a lower interest account. Know that the less you go into debt, the easier it is to make your payments and the better your credit rating will be. A good financial health and credit report will attract lower interest rates, which is important when you negotiate for your mortgage. Entering into the vicious cycle of excessive indebtedness will only cancel this advantage.

Taking control over your personal finance also means taking control of your life. When you free yourself from the obligation of constantly generating income, you will make a better career choice and be happier. You will be surprised to what extend these three tips will help you gain control of your finances and give you the freedom to make the right choices in your life.