How to Avoid Slipping into the Debt Trap Again

Debt Proofing the Holidays
(Stock photo)

Staying out of credit-card debt is the next step after getting out of credit-card debt. In the personal finance world, you often hear about the four main steps to financial success: 

  • Having an emergency fund
  • Paying off debt
  • Saving for future spending
  • Investing for long-term expenses and retirement

What we don't talk about a lot is staying out of debt once you've paid off your debt the first time. For the purposes of this article, we're going to talk about credit-card debt, but many of these principles can be applied to other "bad" debt like personal loans, excessive car loans, excessive student loans and payday loans.

For many people, getting out of debt is the start of a roller coaster of accruing debt and paying it off and then accruing more debt. While it is a success every time you pay off your debt, the next big step is to stop getting into debt in the first place.

So how do you stay out of debt once you've gotten debt free? There are a couple of different strategies, and each one has pros and cons.

Pay Cash for Everything

Some people find that they just can't control their spending when they have credit cards in their pocket. In that situation, avoiding credit cards altogether is the right answer. Sure, you won't be earning cash back or other benefits, but those benefits are not worth accruing a balance you can't pay off at the end of the month. Be honest with yourself: Are you in a place where you can use your credit cards responsibly?

I am not advocating that no one should ever use credit. Far from it: Credit is a useful tool and can be a huge handrail to accomplishing your financial goals, but I concede that there are some people who shouldn't use credit at all. We have to know our own limitations in life.

Save for Future Spending

I'm a big fan of pre-planning your spending, and saving for expenses in advance. It's a smart financial move, but the reason I like it is because it makes expenses less stressful. Kid breaks their glasses? No problem, there's money in the health-care expenses account for that. Uniform boots blow out? Biggest problem is whether the right boots will be in stock, not how to pay for them.

There are a hundred ways to save for future spending. Some banks allow you to keep sub-accounts within one bank account. Many people use a spreadsheet. I have about 10 different savings accounts. Physical envelopes with cash work. (It was our first step into pre-planned spending, and it changed our financial life.)

It doesn't matter how you do it, as long as you do it.

Build Guardrails in Your Financial Plan

Guardrails are important in life. They keep you on balconies, they keep cars from crashing into rivers, and they help keep your financial life on track. There's only so much damage you can do if you've built the right guardrails.

What do financial guardrails look like? Sometimes they're tricky. They can be broad, such as "don't spend more than you earn each month," or very specific, such as "we only order pizza twice a month." They can be about a certain category of spending, a certain dollar amount or a certain percentage of something. A common guardrail used to be that you shouldn't spend more than 25% of your monthly income on housing - though that guardrail has had to flex a little lately.

Great guardrails that I've heard of include never spending more than $100 without sleeping on it first, always shopping for something used before buying it new and following a pre-organized financial plan.

Ultimately, staying out of debt requires just as much discipline as getting out of debt in the first place. It is a little easier because you usually have more financial freedom once you are debt free, and you have the experience of doing hard things when it comes to your money. Use the skills you learned when paying down your debt to prevent yourself from getting back into debt again. You can do it.

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