When it comes to debt, we’re the captain of our ship. Every decision we make either steers the ship on the right course or into troubled waters. Depending on the financial waters you’re in, the next decision you make about a new debt responsibility could find you stranded at sea.
Avoiding all debt is next to impossible, but we can consider the course new debt might point our ship toward. In the heat of the moment, certain purchases might look appealing like the new sneakers that were just released, the fancy digital front loading washing machine, or that new car over a used one. Before setting sail on running that credit card once again or taking on a new loan, take some time to consider these areas.
Needs & Wants
For many people, needs and wants can be a trick question. Depending on your values which are typically based on your personal feelings, it can be easy to confuse the two. Needs are required to live and function, while wants are related to a desire to possess something. Let’s face it, everyone needs food, clothes, and shelter, but quality and quantity can differ greatly.
Set clear parameters for yourself that leave your feelings at the door. Start with the essential needs: food, clothes, shelter, and health care. This is where a budget can help determine how much to spend on each category. For example, a filet mignon every night might damage an otherwise healthy bank account. Create a monthly budget that includes each essential need and one that stays within your income level. Scale that monthly number down to an average purchase amount. Once you know how much you can feasibly spend on each need, it’ll reduce those attractive impulse buys and keep you from spiraling out of control.
In today’s day and age, we’re used to getting everything instantly. The internet gives us access to information at our fingertips and our phones give us access to communication across thousands of miles. We use them both daily and on a subconscious level, we begin to expect everything else in our lives to be at our whim.
Good old discipline can be an effective route. Go back to that faithful budget. The numbers don’t care how bad you want that new pair of shoes hot off the production line. If you don’t have the money to spend today it’s outside the parameters you’ve set. But, if your budget is done right, you’ve set aside a monthly amount you can spend on those shoes. Exercise your willpower to tuck away some of that money each month. Before you know it, you’ll be able to get your wants met without breaking the bank.
Another way to look at debt is to consider how a new debt will impact your debt-to-income ratio. Put simply, the debt-to-income ratio compares your debt payments with your total monthly take-home income. Lenders look closely at this aspect of your finances before approving an application so it’s in your best interest to consider what it is before jumping into a new purchase.
To assess your debt-to-income ratio, tally up all the payments you owe toward your debt (don’t forget to include rent). Then take the debt number and divide it by your take-home monthly income. Let’s say your monthly rent is $1,100, you have a car payment of $400, a minimum credit card payment of $300, and a gross monthly income of $7,000. Your debt-to-income ratio is 26%. Generally speaking, lenders are more willing to lend money to people with ratios of 50% or better. A mindful glance at this ratio can protect your long-term goals, and even save you a catastrophe if a last-minute emergency happens.
Interest rate shopping can save a lot of money. Depending on the situation, this can be easier said than done. When your old car takes a dump and a new one is vital to maintain employment, you need something to get you back on the road fast. It doesn’t mean you need to take the first offer the dealership makes that fits inside your monthly budget. Especially at dealerships, don’t hesitate to walk out and look for a better deal. Sometimes it can be helpful to slow down to speed up — shopping for a better interest rate on any kind of loan is a perfect example.
At the end of the day, you want your finances to work for you — not the other way around. Sometimes new debt is unavoidable, sometimes it’s not necessary at all, but it can always be less severe if we consider other aspects. Unsure of where to start? Get a professional at Advocate Debt Relief involved. You’ll likely take your first step toward more financial freedom and sail toward a destination you’re excited to reach.