Habits Of People Who Stay Out Of Debt
Getting out of debt gets a lot of attention in the personal finance world, but what about staying out of debt?
It may sound like hard work, but it can be a lot easier than you think. If you take a look at successful people – in whichever area you choose but in this case financially – you will spot a pattern. The pattern tends to be when you look at their habits.
The Oxford dictionary defines a habit as:
“A settled or regular tendency or practice, especially one that is hard to give up.”
A psychological definition of a habit is. “An automatic reaction to a specific situation.”
As you may know if you have been reading my blog before, I study a lot of psychology in my degree (Criminal Psychology) and there is a lot which overlaps into the personal finance space. The reason for this is that the way that we think about money defines how we use it.
Our brain is incredible – but it is a creature of habit. (See what I did there?!). Our brain enjoys doing the same things over and over, and doesn’t really enjoy change, even when we know deep down that if we do something new it would greatly benefit us.
The best thing for us to do, is to identify a new habit that will enable us to achieve whichever goal we are working towards and do re-train our brain to do that.
When you start off on your journey to pay off debt, there will likely be a bunch of new habits that you have to start in order to achieve this goal. Once you have paid off this debt, you will need to keep up these habits and possibly start some new ones. However, if you have never been in debt before, it is likely that you will have certain good financial habits even if you are not aware that you have been doing them!
Follow a Budget
One of the most important things that you can do, which I always go on and on about, is to create a budget. The reason that I believe a budget is important is because it allows you to track your money. When budgets are not involved, what tends to happen is that the money runs away from you. It may go in big surges such as deciding you want to buy a lot of expensive items, or it may trickle away from you with buying little bits here and there.
Creating a budget means that you are making a plan for where you want it to flow. When budgeting, you tend to think a bit more long term and on big financial goals. Instead of just going along and losing time, you know what you want to do, and you work towards that.
You will clearly be able to see how much money you have coming in (through your job after tax, through any benefits or extra income) and how much you have going out; instead of just guessing and realising that you have no money left at the end of each month.
There are various budgeting methods that you can use such as the Zero-Sum Budget or the 50/20/30 Budget. I personally use the zero sum budget because I like allocating all of my money to specific places.
If you have a financial goal such as saving for a house, it can be easy to say “I really need to save…” or “I really want to buy a house…” and then turn around a year later to see that you have nothing saved (looking at you husband!). Following a budget will allow you to specifically allocate money to save each month towards your goal.
This will enable you to stay out of debt, because you will have money saved towards your goals and will not dip into your monthly income for things that you want.
Live Below Your Means
Living below your means basically means that you spend less than what you earn. It may sound obvious and simple, but the reality is that many people spend all of their income each month. It is easily done, especially if you do not have a budget in place or do not look at your bank statements.
If you look at many successful people, you can see that they live below their means. What this means is that they do not spend all of their paycheque each month – they save a lot of it instead. And by a lot I mean – a LOT. Does saving 50% or more of your income sound inconceivable to you? It can be done!
If you want to get out of debt and stay out of debt, living below your means will be the key to doing so. You aren’t going to get anywhere fast if you waste all of your money each month!
Expand Your Means
This may seem contrary to what I have said above about living within your means, but what I mean by this is that you don’t need to cut back on everything that you would like in life in order to stay out of debt.
If you are in the stage of your journey where you are paying off debt, I think that you should absolutely live below your means – because getting out of debt is an emergency – you are only robbing your future self by staying in debt, and you should work very hard in order to achieve debt freedom.
Once you have reached debt freedom, I am of the opinion that you should expand your means. Everyone won’t agree with this – but there is nothing wrong with wanting certain things such as exotic holidays, if you can afford them due to working hard and keeping your expenses at a sensible level.
If you want a particular lifestyle, you can work hard and smart to achieve this. Increase your income through working more or by raising your rates, and buy the things that truly make you happy. I wrote about how frugality can clarify your goals, because I believe that if you live a frugal lifestyle, it will become pretty much immediately presented to you what it is that you miss, or require to keep your happiness levels up.
Only Pay For Things If You Can Afford Them
In society today, we are encouraged to spend money on whatever we want, whenever we want. We have much more access to celebrities than ever before, and it’s hard to not compare your own life to theirs, especially on social media platforms such as Instagram.
You can’t even go in a supermarket to buy food without being bombarded with clothes, toys, makeup and electrical products. We turn on the TV and are greeted with an influx of advertisements – same with listening to the radio or even driving down the road to see the side of the road plastered with billboards.
We see people buying lots of things, going on exotic holidays, and have no idea how they have paid for it (the reality could be that they have gotten into debt to pay for these things – so nothing to aspire to).
For myself personally, when I got into debt it was because I had no support and felt as though I couldn’t do anything to improve my situation. I saw my peers buying expensive houses, going on holiday, buying new things all of the time – all whilst having savings and staying out of debt. I also loved Instagram, especially the accounts with kids bedrooms and fashion.
I felt like a bad mum – why couldn’t I give my daughter those things that the Instagram kids had? They looked so happy and their families looked perfect. Of course, social media only portrays the ‘good’ parts of life, and you have no idea what is going on behind closed doors.
A lot of my debt came from trying to be ‘normal’. I wasn’t trying to be overly extravagant, just to try and do some things that I deemed to be a normal way of life for most people.
Once I had gotten myself into debt, I panicked because I knew that I could not afford to pay it back. If I couldn’t afford it in the first place, how on earth was I going to pay it back?! Some people do think like this, but others think that paying the minimum amount each month is ok, even if it is going to span over a few years – because it is ‘manageable’.
See something you want? Sit on it for a while – see if you still want it after a few days, and if you have enough money to buy it, go for it! It’s your money after all, and you can decide what you want to spend it on. All I ask, is that you only buy something if you can afford it.
And I don’t mean putting something on the credit card with the intention of paying it off soon – as that only leads to bad financial times – but having the money in your account and being able to pay straight away or in cash.
Be Grateful For What You Have
Easier said than done I know – but being grateful for what you have is one of the best things that you can do for yourself at any point in your life.
Again with the celebrity lifestyles that we are exposed to now – it has become the norm to aspire to be like these people – and if you are seeing them on social media, they will probably only be posting about the materialistic aspects such as their clothes, cars, holidays etc.
I do believe, as mentioned above, that living a frugal lifestyle is good for clarifying your goals. If you strip everything back to the bare bones, you will find an amazing thing happens – you adjust. Used to living a luxurious lifestyle? This may be a challenge for you at first, but you can do it.
When you focus on cutting back on your expenses, you will probably end up doing more things yourself. An example of this could be cooking your meals at home from scratch. A side effect of this will not only be saving money, but a sense of accomplishment and pride. This will transfer over into other areas that you are trying to be more frugal in such as if you are cutting back on transport costs, you may switch to walking or cycling instead of driving, and find that you actually much prefer being out in the fresh air, and feel better for the exercise.
Keeping up with the Joneses is a real thing, and it is a dangerous way of thinking. However, don’t feel bad about doing it – it is part of human nature after all. See another person with something that is better than what you have? Seems useful for evolution and survival, don’t you think? The problem can be that it is overwhelming, and it’s not so easy as it was to go and get a round stone during the Palaeolithic period that your neighbour had – now it’s more like lusting over a Range Rover because your friend has one (in case you’re wondering, yes one of my friends has one!).
We can get into a bad habit of not realising how amazingly blessed we are. I can be guilty of this myself, but I make sure that I practice positive thinking, and it leads to me feeling very happy with what I have. I do desire more or different things to what I have, but I know some things I will never achieve (probably too late to be in the GB hockey team!), but some things I can definitely achieve in the future, which is what I concentrate my energy on.
Many people find themselves in debt through no fault of their own – an emergency has happened and they have had no savings to fall back on. Unfortunately, things happen in life which are completely unexpected and we can not completely prepare for – but if we have some financial help for these kind of situations, it will make it much more stressful.
If you have a horrible emergency occur, such as the death of a relative, wouldn’t you rather not have the added stress of money on top of everything else?
An added benefit of having savings, is that they will earn extra money on top of what you save originally, if you put it in an account with a high savings rate (or if you invest it well).
To stay out of debt, having savings can prevent you from needing to put emergencies on credit cards or taking out loans. It really is that important.
Life happens – we are super busy people (even if it’s just watching Youtube videos for 4 hours straight…just me?). We forget things, we do things late, we mess things up. One of the ways in which we can prevent doing these things with our finances, is to automate them. This therefore allows for no human error!
Internet banking is the best thing ever. There is no excuse for not organising your finances if you have internet banking – get it if you don’t have it already!
You can easily set up direct debits and standing orders to companies or people, with amounts and dates to go out of your account. There should be a section where you can view all of these so that you can see the total list, which will also help you with your budget.
Have Multiple Income Streams
In line with expanding your means to live the lifestyle that you want, you will find that increasing your income will greatly help this! Not just increasing your income in one way though, but by creating multiple income streams.
You have probably seen the quote floating around that the average millionaire has a minimum of 7 income streams. A millionaires income streams probably looks a bit different to mine; most likely things like stocks, rental properties etc.
The best thing about having multiple income streams is that if one disappears, you will be ok (especially if you also have savings as discussed!). You may have seen in previous posts or on social media, that I lost one of my part time jobs. I had 2 part time jobs – one in the evenings that I’d done for years, and one that I do during school hours 3 times a week. I was not expecting at all that I would lose one of these jobs, and was very surprised when I lost my evening job. It was through no fault of my own, just down to that part of the business changing.
I panicked for about a second, as I used that money to pay my bills, before remembering that I have my other part time job that I can use to pay my bills. The relief from having that backup is amazing. You don’t necessarily need to have 7 income streams, but the more the better if you are able to easily maintain them.
If you are interested, my income streams are my part time job, blogging, dog boarding and other things I do on the side to earn extra money. I would love to include stocks and rental properties to this in the future.
Have Financial Goals
A huge part of begin able to pay off your debt in the first place is to work towards a goal. Having a goal gives you motivation, keeps you inspired and with your eye on the prize.
I am a big fan of goals, and think that everyone should have short term and long term financial goals. As much as we don’t like to admit it, money is important for achieving what you want in life. Want to travel the world? Want to emigrate to another country? Want to own your own home? These things require money.
They can be as big or small as you like – they are your goals after all. The goals that got you out of debt can keep you out of it as well. I’m not saying to be obsessive over money goals for your whole life, but if you have positive goals that you wish to work towards, this will keep you focused.
Keep An Eye On Your Bank Account
Hopefully you will have automated your direct debits and various other commitments, but that’s no reason to never check your bank account or bank statements.
There are other transactions which will come out of your account, and keeping an eye on this is very important. It will help protect you from fraud or from other mistakes made from companies.
In my article about whether companies are overcharging without you realising, you can see that companies may accidentally charge you the wrong amount, and this can have disastrous consequences for you if they add a few zeros onto the end!
Be Prepared To Adjust
An important aspect of staying out of debt – and being successful financially – is being able to adjust. Things will happen – some good, some bad, and being able to adjust to them will allow you to stay on track – or create a new track.
What we decide we want to happen in 10 years time, may be dramatically different to what we actually want when that time rolls around. The best that we can do is make the most sensible decisions that we can, and hopefully be ready for anything that life is prepared to throw at us.