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Avoid Falling Into Debt With Smart Financial Management

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Climbing back out of debt is never an easy thing to do, but the overwhelming amount of freedom and relief that you will feel once you do pull yourself out of it will be something unlike you have ever felt before.

But remember, just because you’ve pulled yourself out of debt doesn’t mean that you will now be debt free for the rest of your life. This is because it’s very easy to begin racking up more debt almost as soon as you became debt free, and to avoid falling back into debt again, you will need to apply a series of smart financial management tips.

In this article, we’ll cover some smart financial management tips and strategies you can use to avoid from ever falling back into serious debt ever again.

Simple Steps You Can Take To Avoid Getting Back Into Debt

Here are some simple steps that you can use to avoid falling back into debt again:


First and foremost, you need to track your money. This simply means that you keep track of every dollar and cent that comes in each month, and every dollar and cent that goes out.

Tracking your money religiously in this manner is the only way you can truly budget yourself and run your finances without being blind.

Based on your income, you can then divide it into your various expenditures, such as your mortgage payment, insurance, food, fuel, and so on. Every part of your financial life should be incorporated into your budget, including seemingly minor expenses such as your daily coffee.

Once any part of your budget is used up, you have to discipline yourself to not spend any more for the remainder of the month, or at least until you bring in more income.

Granted, you may worry about unexpected or emergency expenditures. For example, what if your car breaks down and you need to get it repaired, or what if one of your children needs more clothes?

Neither of these examples are excuses to go back into debt (AKA, don’t put these expenditures on a credit card and then fail to pay it off). Instead, you need to have a spending plan in place and only use cash that you have on hand.

For unusually large expenses such as a broken car or a medical emergency, you can turn to your emergency fund (you do have one of those, right?).


Many people are under the impression that living a debt free life and avoiding ever falling into debt again will require them to live extremely frugal lives and not buy anything that isn’t necessary.

But in reality, you can and should grant yourself a little breathing room. This means that it’s perfectly fine to spend money on things you want but don’t need, so long as you use cash that you have on hand.

In other words, there’s nothing wrong with buying new clothes, going out to eat or to the movies, or taking that weekend trip to a remote cabin to get away from things. Just make sure that two rules are followed:

  1. You pay for those kinds of things with cash that you have available
  2. You DO NOT take away money from other areas of your budget in order to pay for them


This doesn’t mean you have to pay with literal cash for each and every expenditure, but it does mean that you need to discipline yourself to only use cash that you have on hand.

For example, many people like to use credit cards in order to accumulate rewards points that they can spend on trips or other fun things later. There’s nothing wrong with this, but you do need to make sure that you have cash to cover any and all expenses that go on your credit cards.

A good rule to follow will be to essentially treat your credit cards like a debit card. In other words, as soon as an expenditure goes onto your credit card, you pay it off as soon as you possibly can afterwards (as in literally a day or two later). This way, you can accumulate rewards points without going into debt.


What about major expenses? Like that Caribbean cruise you’ve always wanted to go on with your spouse, that new TV you’ve always wanted, a new car to replace your old one that’s been breaking down, and so on?

Well, making major purchases like the above examples are perfectly fine even as you seek to live a more frugal and debt free life. The only condition is, as we’ve touched on repeatedly already in this article, is you can only use money that you have readily available.

Therefore, if you don’t have the money on hand for those kinds of major expenses, you need to plan out how you’re going to buy them. The way you do this is you need to set aside money to save up for them in your budget. Once you have enough cash on hand saved up, and assuming that you don’t have any other big emergency expenses that have unexpectedly popped up, you can then make the purchase.


Without question, a part of your budget must go toward setting aside money for savings. It’s generally a good idea to have a savings account separate from your checking account, as well as an emergency fund that you contribute money to as well.

Discipline yourself to contribute a percentage of your income into both your savings and emergency fund accounts each month, no matter how much or how little money you are making. Many financial advisers recommend that you set aside at least 5% of your monthly income into your savings and/or emergency fund, at the bare minimum.

As a golden rule, you’ll want to have at least six months of living expenses set away in your emergency fund. If you currently lack an emergency fund, make it your mission to set aside one month’s worth of living expenses, and then steadily build it up from there.


What did it feel like when you were living in debt? If you are like most people, you probably suffered from stress, anxiety, and a burning wish that it would just go away.

To help yourself avoid falling back into debt again, you can remember what it was like living in debt to motivate yourself to follow the above kinds of smart financial management habits that we’ve just covered.

Mistakes To Avoid

Many people who pull themselves out of debt fall back into even greater debt later and even after following most if not all of the above financial management tips we’ve covered.

Why? The reason is simple: they made any number of mistakes that caused them to fall back into their old spending habits. We’ll cover some examples of those kinds of mistakes now:


Many people believe that it is wise to close each of their credit cards the moment they get out of debt. It’s only logical, at least in theory. After all, if you racked up significant credit card debt, getting rid of your credit cards (after you pay all of it off, of course) will be the only surefire way to ensure that you never fall back into credit card debt, right?

But in reality, closing your credit cards will shorten your borrowing history, which can make it more difficult for you to secure loans in the future (and you may need to take out a loan for a house or a car).

Even if you do manage to secure a loan even with closed credit cards showing up on your credit report, the interest rate that you’ll have to pay will almost certainly be much higher, which will obviously cost you money and can cause you to get back into bad debt later in the future.

What’s more, is that a closed credit card showing a zero percent balance can remain on your credit report for up to a decade (although seven years is more likely).

A better route to take will be to keep your credit cards active but to more tightly discipline your spending habits with them. As we discussed previously, you can and should discipline yourself to pay off your credit cards as soon as possible after buying something with them.

This leads us into our next major mistake to avoid, which is:


Don’t be under the impression that just because you’ve dug yourself out of debt you should forget about your credit history and reports, even if you don’t plan on taking out a loan over the next several years.

As we just noted, closing your credit cards will be a poor decision to make because it will have a negative impact on your credit history. Instead, it will be better to keep your credit accounts open, even if you don’t want to use them out of fear of going back into credit card debt again.

If you absolutely don’t want to ever touch your credit cards ever again, something you should know is that some creditors will close accounts that go long enough without any activity.

For this reason, you should still make it a rule to make at least one small purchase a month on a credit card (such a cup of coffee or gasoline), and then pay it off right away to ensure that the account remains active and won’t harm your credit rating. You simply need to ensure that you maintain credit history.

In addition, you should still check up on your credit report off and on as well. As a golden rule, you should check it at least once a year, but some financial experts recommend that you check it at least twice or three times a year instead.

This is because even if you don’t plan on taking out a new loan over the next few years, you still need to keep yourself in full control over your finances, and that means being aware of where you stand on your credit rating.


In other words, you get lazy. This is a big mistake to avoid because getting out of debt is no excuse to become lazy over your financial situation.

If anything, getting into debt and then climbing your way out of it should be a wake-up call that you need to be in greater control over your finances than ever before.

You also want to be careful that you don’t fall back into the habit of spending cash you don’t have on hand like we discussed previously in this article as well.

The solution? Set a budget. Even if you don’t have any major financial goals, like a house or anything else major that you want to save up for or a certain amount of savings you want to have in the bank account, simply setting and keeping a budget will help keep you in control of your finances so you don’t fall back into the same pitfalls.


As you can hopefully see by now, living debt free doesn’t mean that you have to live a boring and incredibly frugal life where you can’t buy anything you want. It just means that you have to apply smart financial management strategies to ensure that you always buy things with cash on hand.

This will certainly require significant patience and discipline, but the trade-off is you will live a life of greater financial freedom and security.



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