Avoiding debt is a key to long-term financial stability. However, data from the Federal Reserve Bank of New York indicates households throughout the United States began 2024 with a record high of $17.3 trillion of debt. Debt also is a problem in Canada, where a recent survey from NerdWallet found that 55 percent of Canadians had credit card debt, which marked a 12 percent increase from the previous year. Perhaps even more telling is that 51 percent of survey respondents indicated they expect it will take them six months or more to pay off their credit card debt.
Debt may seem unavoidable in a time marked by high inflation, when the cost of everything from groceries to entertainment has increased significantly. Thankfully, various strategies can help individuals avoid falling into debt.
• Prioritize an emergency fund. Unforeseen expenses, whether it’s major auto repairs or unexpected medical bills, can quickly land consumers in financial hot water. In fact, a recent survey from the Kaiser Family Foundation found that more than half of all adults in the United States report going into debt in the previous five years due to medical or dental bills. Roughly one in five respondents indicate they don’t ever anticipate paying off such debts. One way to avoid such a fate is to prioritize building an emergency fund that can be accessed whenever sizable, unforeseen expenses threaten to derail your finances. Resist any temptation to tap into an emergency fund during non-emergencies, and continue to grow the fund with routine contributions each month.
• Utilize automatic transfers via your bank. Banks enable account holders to set up automatic transfers, which make it easier than ever to save money and thus avoid debt. Consumers can examine their finances and determine how much from each paycheck they can automatically transfer into a savings or retirement account. Once that number is determined, set up the transfers so you are not tempted to spend the money come payday.
• Build and maintain a good credit rating. A strong credit rating is advantageous for many reasons, not the least of which is the cost savings associated with such a reputation. When borrowing money for big-ticket items like homes and vehicles, individuals with high credit scores generally receive better lending terms, including lower interest rates. Over time, the money saved by earning a lower interest rate on a mortgage can equal tens of thousands of dollars, and those cost savings can help consumers avoid utilizing credit cards to pay for unforeseen expenses like home repairs or medical bills.
• Become a disciplined consumer. Online shopping has made it easier than ever to spend beyond one’s means. A new wardrobe and expensive concert tickets are only a few mouse clicks away, and that accessibility can tempt consumers to spend beyond their means and accrue a substantial amount of debt. By resolving to remain a disciplined, savings first consumer, individuals can avoid the pitfalls of debt.
Debt can have both short- and long-term consequences. A few simple strategies can decrease the chances individuals join the debt-riddled masses even during a time when cost of living is especially high.
