Whether you are debt-free or on the path to paying off your current balances, the threat of incurring new debt could be just around the corner. The roof could need replacing tomorrow; your car could break down today. In order to prevent future debt, you have to prepare for the unexpected now, which takes time, effort and planning.
If you have current debt, this is the place to start. Nothing will motivate you more to avoid future debt than paying off current debt. When you've made sacrifices for months and years to pay off debt, you’ll move mountains to prevent getting yourself back in the same situation.
The success of your financial life often comes down to how well you handle a financial emergency. There is only prepared and unprepared. Unprepared leads to poor and necessary decisions in the moment. The only way to prevent moving backward is to prepare in advance for whatever life may throw at you. This requires planning ahead and saving money for emergencies.
If you are currently working to pay off debt, you are probably stuck on the question of whether to save money while trying to pay down your debt. It's a conundrum, but one that can be solved by this rule of thumb: if you are currently in debt, start with an emergency fund of $1,000. Having this much on hand can prevent a debt spiral in many emergency expense cases, but it won't deflect too many resources from your debt reduction plan.
Once your debt is paid off, start building a full-size emergency fund. Financial experts typically recommend that your emergency fund be equal to three to six months’ worth of living expenses and that you keep it in a separate account. This money is not for a new car, wedding or vacation. This money is for actual emergencies like medical expenses and major home repairs.
One way to build your emergency fund is to have part of your paycheck automatically deposited into your emergency account. If you’re eager to hit your goal amount as quickly as possible, consider getting a “side hustle” or selling unwanted or unused items and using the proceeds for your emergency fund. If you need to withdraw money for an emergency, replenish your fund as soon as you’re able.
If your goal is to prevent future debt, then you would pay off your current debt, establish an emergency fund, and start saving for future purchases, rather than diving back into the debt pool. It’s difficult to save without knowing what you spend, and that means creating and following a budget. There are plenty of resources online concerning budgets, but none of those resources will be useful until you implement the information and follow it in your daily life.
Once you’ve created a budget and are following it consistently, move excess funds to a separate account designated for future non-emergency purchases, like vacations or new furniture. Excess funds would mean that your expenses for the month were covered and your emergency fund was at its goal amount. Again, if you want to take an aggressive approach, consider side hustles and selling unused items to get to your goal faster.
Preventing future debt is all about planning and saving now: paying off current debt, establishing an emergency fund, and saving for future purchases. It takes plenty of perseverance, creative thinking and self-control, but avoiding the stress and complications of debt will be well worth the effort.