Avoiding the Debt Cycle

Failing to borrow responsibly is when we end up in the vicious debt cycle
Debt can come in many forms. We have personal loans, student loans, home loans, credit cards, payday loans, the list goes on and on. Debt can be useful if it helps better our financial position, like the acquisition of an asset or the opportunity to obtain one. Debt can also be good if the outcome assists us psychologically too, like being able to have an O.E. and having experiences that we will remember for life. Yes, debt can be hugely beneficial, but as most of us will know, it can be bad too. A lot of us tend to think negatively about debt as failing to take control of debt can lead to interest payment on top of interest payment, costing us lots in the long run. This risk of getting further into debt is why, if we do borrow money, we must do so responsibly. Failing to borrow responsibly is when we end up in the vicious debt cycle. The debt cycle is when we end up spending more than we earn. We get hit with even more increasing costs and then we are faced to borrow even more for a temporary fix rather than dealing with the problem up front. None of us likes to admit defeat. We may feel embarrassed by the situation and don’t wish to reach out for help. Or we may believe that things will be changing soon, that we will get a pay rise and that everything will sort themselves. Having this attitude is what gets us in trouble because when an emergency comes up and we just chuck it on our card, we just make the situation worse and worse. We have countless blogs addressing how to tackle debt (which we advise you to check out), so today instead we are going to discuss some tips on how to avoid getting into this cycle.

#1 Make Sure You Can Pay Off Your Cards

Generally, we recommend avoiding credit cards as they are risky business. It’s spending money we don’t have on things that most of the time we don’t need. We understand if it may be an emergency, but in order to prevent debt cycles, we should be prepared for such events. A credit card can be our friend if we can pay them off at the end of the month, meaning we don’t have to suffer that interest build up. But if we are unable to pay off our card, then the debt cycle may begin.

#2 Have an Emergency Fund

This is what we mean when we said earlier that we should be prepared for such events. Emergency funds are vital to avoiding the debt cycle as it means we can tap into these finances, instead of racking up more debt. Our emergency fund should also be separate from our savings account so that way we won’t fall into the trap of regularly withdrawing from both accounts. Some of us may have a saving account that gives us bonus interest if we don’t make any withdrawals from it. This is why we recommend keeping these accounts separate and having an emergency fund. Let’s keep our savings growing and our debt down.

#3 Don’t Let Money Make Your Life too Easy

OK, this sounds a little silly but hear us out. When we get more disposable income, we tend to spend it more regularly and without hesitation. We start eating out more, we always buy our lunches, we upgrade our brands, and we start throwing out objects instead of repairing them. We start paying for services that we would have otherwise done ourselves because we become lazy and it’s just easier to pay for it. We may have people call us tight for not doing these things or else we might suffer FOMO (fear of missing out) as all our friends went out for dinner and we didn’t. But we don’t have to spend money to have fun or communicate with someone. We should start making our lunches and learn to cook, clean our car at home or learn how to repair our iPhone screen ourselves, instead of buying a new phone. Let’s try not let our new disposable income disappear as fast as it comes in.

#4 Don’t Borrow the Maximum

When we borrow money, we tend to go for the maximum we can get. We borrow the maximum allowed because we figure we might as well get the most out of the process while we can. For example, we may be after a new phone, and we decide to go on a repayment plan to get one. Instead of upgrading to our intended model we think to ourselves that we might as well get the latest model and pay that little extra since it’s not money we have anyway. The newer model might have a wider screen or a better camera, but is it worth the additional weekly payments or the longer term that we got the plan on? We don’t have to get the max deal just because it seems more money efficient.

#5 Don’t fall for the Up Sell

An up sell is just more money in the pocket for the lender. It’s when we initially go to buy a product, but then we are offered a better product or more of a quantity at a more efficient price. It’s following on from the, ‘don’t borrow the maximum’ tip, we shouldn’t trade up just because the retailer tells us that we would be saving money. It’s like when someone goes to buy a new laptop for $1,599, but the retailer shows them a special for a new laptop that is down from $2,499 to $1,999, and they tell everyone they saved $500. Sorry to say this, but they didn’t, they just spent $500 more.

Bonus Tip: Cut Subscriptions

Yes, we said it, cut subscriptions. Things like Sky TV, Magazine and Newspaper subscriptions. We live in a sharing economy where all the information and content we want is available online. Netflix has a lot more to offer than Sky television half of the time, and we can read the news online or while we scroll through our Facebook news feed. We know there are some things we can’t just cut, but it’s surprising how many providers are producing the same content that we would get in our paid plan, online for free.

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