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Investing and Economics Blog

Personal Finance Basics: Avoid Debt

image of Droid Incredible cell phone

Many aspects of personal finance can get a bit confusing or require some study to understand. But really much of it isn’t very complicated. Debt is often toxic to personal financial success. The simple step you can take to avoid the problems many face is to just not buy things until you save up for them. If you want some new shoes or new Droid Incredible or to go see a football game (American or World Cup style) that is fine. Just save up the money and then spend it.

If you limit your borrowing you will get ahead financially. I think borrowing for a home is fine (I suggest saving up a 20% down-payment – or at least 10%, and many banks are again requiring this sensible step). And don’t overextend yourself – borrow what you can comfortably afford – even if you run into financial difficulty. It might be likely you earn more 5 years from now, but it is certainly possible you will earn less. Remember that.

Borrowing for school is fine but be careful. Huge education debts are a large burden. Don’t ignore this factor when selecting a school. And don’t fall prey to the for-profit education scams that have become very prevalent. I would be very very skeptical of any for profit educational institution and would much prefer long term public or private institutions with long term success (colleges, universities and community colleges). Technical training can be very good but you have to be very careful to not be taken advantage of.

Borrowing for a car is ok, but I would avoid it if possible. And other than that I would avoid debt, if at all possible. If you want a big expensive wedding, fine, save up the money. If you want a vacation to East Africa, great, save up the money. If you want the latest, new tech gadget, great save up the money first.

And saving up for your emergency fund (if it isn’t fully funded already) and for retirement should be right after food, shelter, health and disability insurance and any debt you already have to be paying back. After you have committed money to your emergency fund and retirement then choose what to do with your remaining discretionary income. It is critical to have built up an emergency fund so if you have any emergency you can tap that without going into debt and digging yourself a personal financial hole you have to dig out of.

Personal financial success is not some get rich quick scheme or magic. Success is Achieved by doing some really simple things well. It is not complicated but that isn’t the same thing as easy. Showing restraint is not what we are urged to do by the marketers. So while not buying what you can’t afford is not exactly an amazing insight, hundreds of millions of people (in the USA and Europe I know, and probably everywhere that consumer debt is easy to get) fail financially just because they refuse to follow this advice.

Related: Avoid credit card debt – How to Protect Your Financial Health – Curious Cat personal finance basics – Can I Afford That?

June 23rd, 2010 John Hunter | 5 Comments | Tags: Financial Literacy, Personal finance, quote, Tips

Comments

5 Comments so far

  1. Carnival of Personal Finance | My Journey to Millions on July 6, 2010 12:07 am

    […] Hunter from Curious Cat Investing and Economics Blog presents Personal Finance Basics: Avoid Debt, and says, “Debt is often toxic to personal financial success. The simple first step you can […]

  2. Avoiding Withdrawing Retirement Savings Starts Early at Curious Cat Investing Blog on November 8, 2010 8:47 am

    Normally the important decision was years before when they chose to take on consumer debt and not to build up an emergency fund. And when they failed to just build up saving beyond that…

  3. Consumer Debt Down, but Still Over $2.4 Tillion in the USA at Curious Cat Investing and Economics Blog on November 9, 2010 10:30 am

    […] in 2009. Hopefully we can increase the size of the decrease going forward. As individuals we should aim to have no consumer debt and build up cash reserves instead (the way the debt figures are calculated though, even if you […]

  4. Truly Free Credit Report at Curious Cat Investing and Economics Blog on June 26, 2011 3:31 pm

    You should review your credit reports annually (at least) to correct any errors. Also doing so can be a tool to help you spot identity theft…

  5. Save What You Can, Increase Savings as You Can Do So at Curious Cat Investing and Economics Blog on November 19, 2012 9:32 am

    […] spend less than you make […]

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