How to Avoid Landing in Debt

    Life is full of stepping stones and for many of the major ones, money is involved.

    Many consumers plunge into huge financial commitments and walk away with enormous amounts of credit card debt, student and car loans or mortgage payments that threaten their financial stability. Some people even find themselves turning to bankruptcy after years of unpaid bills and feeling helpless.

    Instead, you can take a proactive approach to how you make these life investments that use your time and money. Whether it is preparing to pay for college, maintaining stable employment, considering launching a small business, or deciding to purchase a car or home, take the initiative to start early and protect your finances.

    Limiting Your Student Loan Debt

    The earning potential in many career fields increases with higher education. For example, graduates with a bachelor’s degree earn 85 percent more over a lifetime than high school graduates without that degree, according to a 2011 study by Georgetown’s Center on Education. The study also concluded that 63 percent of American jobs will require post-secondary education or training by 2018.

    Choosing to put your time and money into an education is a long-term investment, and one that may be more costly than rewarding if you are not careful. Researching ways to make education affordable, including enrolling in a two-year institution and depending less on student loans, can help you pursue your future career and a debt-free life.

    Consider Two-Year Institutions Over Four-Year Colleges

    While you debate about which college to attend, make sure to examine the financial repercussions of high tuition costs. Look at alternative ways to save money, such as attending a non-traditional educational institution, seeking all types of financial aid and choosing careers in public service fields which  qualify you for student loan forgiveness.

    Two-year institutions, like community colleges or technical schools, often offer competitive programs at a lower cost than traditional four-year institutions. The current cost of a two-year community college degree is about $6,262, according to a 2013 publication from the College Board. A bachelor’s degree from a four-year, private residential university can cost as much as $158,072. The significant difference in cost can keep you from taking out loans that will take years to pay off.

    Seek More Scholarships and Grants, Less Student Loans

    Researching all available types of financial aid, not just student loans, can help stave off college debt.

    Find need- and merit-based grants as you begin your search. This type of financial aid is ideal, since it does not require repayment. Seek out scholarships using web search engines, your guidance counselor and the financial aid office at the schools you are considering.

    There should be scholarships tailored specifically to the school and degree program you are seeking. Re-apply for more aid even after you complete your first year. Any time spent filling out applications now will be worth the money saved years after school finishes.

    The federal government provides financial aid in the form of loans. These loans have low interest rates and various repayment plans to meet the needs of students at varying economic levels. While you may need additional private loans to cover all costs, those come with higher interest rates and limited repayment terms, and require a solid credit history.

    Repaying loans can be difficult, but if you choose a career in public service, your federal loans may be eligible for student loan forgiveness. Public service jobs include: Government, emergency management, military service, public safety and law enforcement, social work, disability services, teaching, legal services and other careers. After 10 years of working in these fields and making on-time payments, any remaining loan amount owed will be forgiven.

    Keeping Yourself Employed

    A basic staple in preventing debt accumulation is maintaining full-time employment.

    Protect the steady income you have by developing positive and professional work relationships — both in your office and your field. Continuously update your resume, increase your job skill set, stay aware of industry trends and seek more education if it is necessary for your position.

    Temporary periods of joblessness, with or without collecting unemployment, can leave you vulnerable to financial struggle. Emergencies occur, bills add up and eventually, you may turn to credit cards or find yourself unable to pay you regular cell phone, utilities and rent bills. Once you miss a few monthly payments, your debt can begin to snowball as interest rates climb, loans enter into default status and late fees leave you stranded.

    Secure Your Place in the Workforce

    Interact with every contact you make within your field on a professional level. All communication throughout your career can provide networking leverage, from someone you meet at an interview or a meeting to a long-term co-worker or boss. If you’re looking to move up or transition to working for another company, speak with someone you know to get your foot in the door.

    Even if you are happy with your position, continue to update your resume, adding new skills and responsibilities as you take them on. It’s easier to make small adjustments here and there, rather than re-writing the whole thing after 10 years.

    If you find there is not much to add to your resume, actively seek out ways to gain more expertise in your field. You can attend conferences, complete freelance projects, share presentations or even volunteer to give weight to your resume.

    Staying current on the trends within your field will also increase your worth as an employee. Follow blogs, communicate with colleagues, learn from experts and pay attention to how your industry changes. For some, more education will be the only way to remain competitive or continue to increase income potential.

    Each of these steps can help increase your job security. Ask your supervisor how you can improve where you are now and always make basic work etiquette such as showing up on time and meeting deadlines a major priority.

    Economics of Launching a Small Business

    Preparing to launch a small business presents unique debt obstacles. Close to 50 percent of small businesses are not successful during their first five years, and for many, this is because of having poor credit arrangements, insufficient capital and excessive debt.

    Prevent debt from overtaking your business venture by focusing on these goals: Waiting until you have saved enough to afford a large portion of your expenses, building your business credit score before taking out loans or opening credit accounts, borrowing only for necessities and minimizing the risks you take as your business grows.

    Some small-business owners, eager to get their enterprises up and running, rely heavily on equity and debt to get started. They commit to more than they will be able to pay back for many years without putting together a budget that will manage both startup and operating costs. While part of successfully managing a business requires investing before profits are returned, the period of time launching your venture should be entered with caution.

    Small Business Spending and Saving

    Take time to save up so that you have a cash safety net to handle unexpected expense. Perhaps one vendor will not come through. Perhaps your equipment will need repairs. Any number of speed bumps can threaten to undermine your finances if you don’t have a “cash cushion” to immediately address these matters.

    Waiting to take out major business loans can give you time to build your credit score, allowing you to be approved under better terms with lower interest rates. Build your credit score by using a business account for costs such as a business phone line, utilities and renting commercial property. Making regular payments on these bills will start to reflect your creditworthiness. Getting a secured credit card, which requires a cash deposit, is another way to add to your credit history.

    Continue making conservative spending decisions even as your business grows. Use your profits for necessary expenses to keep the business running, rather than spending thousands on marketing or buying the newest office equipment. By minimizing your risks, your business will be able to go through high and low periods of growth and profitability without major losses. 

    Tax Time Is a Tricky Debt Pitfall

     Americans owe $114.2 billion in taxes and around 14 percent of federal taxes are unpaid every year. While you are young, it seems simple having only a few W-2 forms and no property or investments. However, as you earn more and owe more, you may commit the easy mistake of not planning a budget that adequately provides what you owe the government. Whether it’s for your business or federal return, make tax payments a priority early in the year, even before the amount is due.

    Budgeting prevents unexpected debt from leaving you stranded. Include taxes in the expenses you owe, and do not spend your income or profits without accounting for those taxes first. Make taxes a priority over non-essential bills or payments you can make later on. If you have overdue payments or no way of handling what you owe now, contact the IRS see about making a partial payment or request an extension. Ignoring tax debt is never the solution.

    Car and Home Loans

     Loans for a car or home can often be the catalyst for debilitating debt.

    The Federal Reserve reports that auto loan debt reached $750 billion in September of 2012 and homeowners are struggling with more than $1 trillion in underwater mortgage debt.

    Having transportation to work and a place to live are not frivolous expenditures; however, pursuing cost-saving options can help you afford what you need to get around and live under, while also minimizing the amount you have to borrow.

    Consider Paying in Cash for a Car

    When it’s time for you to purchase a vehicle, consider looking at used cars, paying in cash, researching shorter leases, lower interest rates and making sure payments do not exceed your income capacity.

    The average difference between a new and used vehicle is $13,000, according to the Federal Trade Commission. Driving an older, reliable car is a way to avoid years of paying off a new vehicle. You can read reviews that will alert you to the used car’s possible problems and research the value of the car before signing the title.

    Saving for months and paying for a car in cash is another way to prevent high monthly payments from controlling your life. Buying a used car in cash may not be a part of the glamorous lifestyle you once imagined for yourself, but the savings are worth it. If you cannot save enough to purchase a car in cash, at least you will have more money for a down payment, which can lower the interest rate you will pay.

    Research auto loans with shorter terms, ideally less than 48 months. This will keep the total amount of interest you pay lower and stop you from being upside down on your loan. You also want to make sure the payments you make are not more than 20 percent of your monthly income.

    Waiting for Your Dream House

    Just like car loans, taking out a mortgage is a huge commitment that shouldn’t be entered into lightly. Finding a place to live is a necessity, but homeownership may not be the answer for you. Now might be the time to rent, while you work on increasing your credit score, build stability through longer term employment and save money for the future.

    If you are farther along in the process, but still not ready to buy, consider property where you can rent to own. The flexibility comes with a cost, but it may bring you a step closer to owning your own home. Whichever route you choose, make sure that your income not only covers mortgage payments, but allows you to contribute to a safety net of savings. A mortgage payment that results in living paycheck-to-paycheck may put your home in jeopardy in the future.

    Deciding your next major financial move can have a significant impact on your future. While you are walking on your college campus, attending a meeting with executives in your company, applying for capital for your small business, signing the title for your next car or touring a home you hope will one day be yours, remember that each choice you make will get you one step farther from or closer to debt.

    Bill Fay

    Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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