If you want to get out of debt, and stay out of debt, you have to reevaluate your routine — the way you spend, save and even think about money.
Here’s the tricky thing about debt: in order to improve your credit score, you have to take on debt and prove to lenders that you can handle it responsibly. But the problem most people encounter is figuring out the responsible part, because credit cards make it very easy to spend more than have — and in many cases, a lot more.
So the first step to overcoming debt is learning not to rely on it, because that’s when things can quickly spiral out of control and end up causing you some serious long-term financial damage.
Then you have to develop sustainable habits. People who get out of debt, and stay out debt, establish certain behaviors that ultimately become part of their everyday life.
Changing your patterns and lifestyle may not be easy at first, but once you learn to control your spending, it will change your life — both now and over time.
7 lessons from living on $60 a week
In a recent article for CNBC, Kathleen Elkins wrote about her ‘cash diet’ challenge — to live on $60 a week in New York City. After covering her fixed costs, she gave herself $60 to pay for everything else, including groceries, bars and restaurants, laundry, toilet paper and transportation.
After four weeks of putting her challenge to the test, here are seven lessons she’s learned so far that help keep her on track:
- Track expenses: She spends a few minutes each day tracking what she has spent and how much she has left, in order to budget her money for the remainder of the month.
- Eat at home: Going out and even buying snacks and drinks on a daily basis can add up, so she’s eliminated it completely. If she plans to go out, she puts money aside in the budget to make sure she can cover it without going over her max spending limit.
- Cut back at the grocery store: With a little effort, there are so many ways to save on groceries.
- Set savings goals: This is the best way to ensure that your spending is aligned with your goals.
- Remember it’s OK to say no: FOMO is real, but it doesn’t last long. Remember what it’s important to you.
- Walk or bike to work: If you have this option, it’ll save you money on public transportation, gas and other costs associated with your commute.
- Go cash only: Splitting up your budget into separate envelopes of cash can help you keep track of exactly how much you’ve spent and exactly how much you have left for the month. If you tend to swipe your cards a lot, try sticking to cash — you’ll likely find that your spending goes way down! When you think about it, it’s a lot harder to let go of a $5 bill than it is to just swipe your plastic.
10 habits that will help you save more and get out of debt
1. Have emergency savings
Saving for an emergency isn’t really the fun type of saving — like, say, saving up for a big purchase or vacation. But the problem is, many people don’t realize how damaging an unexpected expense can be until it’s too late.
According to a survey by the Pew Charitable Trusts, 33% of American families say they have no money that they think of as savings — including 10% who earn at least $100,000 a year.
â€œAmericans have very little saved in preparation for financial shocks, putting many families at risk,â€ said Clinton Key, a researcher for Pew’s financial security and mobility project. â€œOur analysis shows that most families will be faced with a significant and possibly destabilizing unexpected expense at some point. It’s critical for families to build emergency savings.â€
If you don’t have emergency savings, how would you cover an unexpected expense? According to Pew, nearly half of people say they would use a credit card.
Read more: 3 things to never pay for with a credit card
Sure, a credit card can get you out of a bind, but it should be your last resort. Because after the unexpected expense is paid for, the problem then becomes the credit card bill — and the longer that balance sits on the card, the more interest you pay and the more damage it does to your long-term finances.
So the way you avoid that is by preparing for it.
The best way to save for unexpected financial shocks is to have two separate emergency funds: a rainy day fund and an emergency fund.
- A rainy day fund is money you might dip into every once in a while to cover an unexpected expense, like a medical bill or car repair. You should start with a goal of saving $1,000, and then when you dip into that money, make sure to replace it as soon as you can.
- An emergency fund is a bigger, longer-term savings fund. This money should be able to cover at least three to six months worth of living expenses — in case you can’t work for a period of time, for whatever reason.
Read more: How to start building emergency savings
2. Live below your means
Until you start living below your means, you will never be able to get ahead financially.
So if you reach the end of the month and:
- can’t pay off your credit card bill in full
- don’t have money left over for savings,
then you are not living below your means and it’s time to make some changes.
If you’re having a hard time controlling your spending, start using a cash-only system. It will force you to start spending only what you have and prevent you from just swiping your card any time you feel like it. When you start spending less than you make, you’ll be able to get your debt paid off much faster, which will then allow you to save more money.
So stick to cash and start reducing your expenses — eliminating wasteful spending can free up a lot of cash each month.
Here are a few ways to reduce your expenses:
- Subscriptions: You likely don’t need all of those monthly subscriptions and by cutting some of them out, you can put more money toward your goals.
- Cable bill: Look for a cheaper plan or alternatives to traditional pay TV.
- Cell phone plan: Consider a discount wireless provider or at least a cheaper plan that gives you only what you need.
- Insurance: Frequently re-shopping your insurance policies is the best way to get the best deal.
3. Pay more than the minimums on credit cards
Credit cards make it way too easy to spend more money than you have. Ideally, you only want to charge on a credit card what you can pay off in full at the end of each month (or end of each billing cycle).
Here’s why you don’t want to carry a balance on your credit card: your payment history makes up 35% of your credit score, while the amount of debt you owe makes up 30% of your score. So if you carry a balance, it not only increases your total debt owed, but it will also cost you extra money in interest charges.
So when you’re trying to get out of debt, paying more than the minimum payments will not only allow you get the balance paid off faster, but it will also reduce the amount of interest you end up paying over time.
If you can’t afford to pay more than the minimums right now, focus on reducing expenses and finding ways to make more money. Extra cash can really help speed up your debt payoff timeline.
Read more: 11 ways to make extra cash each month
4. When you pay off a debt, keep making the payment to yourself
Once you get a debt paid off, take the same amount of money you were paying each month and put it into savings. If you learned to live without it while you were paying off that debt, you can continue to live without it and start building up your savings!
5. Spend with a purpose
Even debt-free people are guilty of making impulse buys, but as a general rule of thumb, if you want to stay out of debt, you must give every dollar a purpose.
Whether it’s the weekly/monthly trip to the grocery store or back-to-school shopping, take a list with you and stick to that list. An easy way to do it is to budget out how much money you have to spend, and then only take enough cash with you to cover what you need. That will prevent you from throwing extra items in the cart and spending more than the budget can handle.
6. Pay with cash
Paying with cash is actually more painful than swiping a card, which is a good thing for people who tend to overspend, according to a study headed by Avni M. Shah, an assistant marketing professor at the University of Toronto Scarborough.
The study, published in The Journal of Consumer Research, found that when people use cash, they tend to value their purchases more, compared to when they use a card.
â€œWhile the convenience of going cashless is undeniable, it comes with an inadvertent downside — we tend to value purchases less when using a card than when we pay via the more â€˜painful’ methods of cash or check,â€ write authors Avni M. Shah (University of Toronto), Noah Eisenkraft (University of North Carolina), James R. Bettman, and Tanya L. Chartrand (both Duke University).
When you use cash, you physically feel the money leave your hands — making you less inclined to spend it on things you don’t really need. So if you’re struggling to get your spending in check, stick to cash.
If you want to go the old-fashioned route, divvy up your paycheck to cover each part of the budget, and then put cash into separate envelopes — that way you know exactly how much you have to spend. If you pay for recurring bills online, make sure there is enough money in your account to cover them, and then withdraw cash to cover your other expenses for the rest of the month.
You can also set up different accounts for each area of your budget and have your paycheck automatically split among those accounts with enough money to cover all the expenses in each category. Then whatever is left should go automatically into savings.
7. Pay attention to details
People who are debt free pay attention to their money — every dollar that comes in and every dollar that goes out, including every single expense, payment and bill.
Tracking your spending is one of the best ways to get control of your finances. By paying attention to how every dollar is being spent, you’re less likely to waste money on things you don’t need, and you’re also less likely to miss a payment, which can do a lot of damage to your credit score since 35% of your score is determined by your payment history.
So if you don’t already, start checking your bank statements on a daily basis. Track every dollar that comes in and every dollar that goes out. That will allow you to start eliminating unnecessary expenses, and then you can use that money to make extra payments toward your debt or toward your savings.
8. Set goals
If you don’t make paying off your debt a priority, then it probably won’t happen. By setting goals, you can keep yourself accountable and keep your progress on track.
If you’re facing several thousand dollars of debt, Clark suggests setting a goal of paying it off in 60 months or less — any longer and you’ll likely lose focus.
If you aren’t making enough income to pay more than your minimum payments, look for opportunities to make extra cash and split that extra income toward your debt and emergency savings. Then once you’re debt free, continue setting savings goals in order to keep yourself on track and avoid getting back into debt.
9. Know when to say no
‘Only this once’ can be a slippery slope and easily turn into thousands of dollars before you even realize it. If you want to be debt free, you have to understand that little expenses do add up over time. It doesn’t mean you have to deprive yourself or never have fun, it just means you have to prioritize your spending in order to reach your bigger financial goals — whether it’s paying off debt, building savings or buying a house.
Putting off a vacation or a big purchase may be difficult — and frustrating — but to keep your finances on track, sometimes you have to pick and choose. Saying ‘no’ can also mean simply tweaking your plans — maybe you just change your vacation a bit to make it more budget friendly.
Bottom line: figure out what’s important to you and keep those things in mind at all times.
10. Hang out with the right people
The people you spend the most time with can not only have a big impact on your life in general, but they can also significantly impact your financial life.
In fact, a recent study about the habits and behaviors of wealthy found that financially successful people have certain beliefs in common, including: ‘I can only succeed if I surround myself with other success-minded people.’
Getting and saying out of debt will at some point or another require you to make tough decisions, and it’s important to have people around you who will support those choices and cheer you on as you make progress toward your bigger financial goals.