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The Secrets of Avoiding Debt

May 22, 2008  |  Difficulty: Easy

Keys to Financial Success

If you are someone who makes resolutions, you may find that it is easier to make them at the beginning of the New Year. Resolutions to improve your financial situation are a good thing to do at any time of year, but regardless of when you begin, the basics remain the same. Following are the secrets of avoiding debt.

  1. Work for What you are Worth and Spend Less than You Earn - While this may sound very simple, this first key seems to be something that many people have a difficult time doing. Research what your job is worth in the marketplace, by compiling an evaluation of your skills, job tasks, contribution to the company, and the going pay rate, inside and outside the company. If you are underpaid, even by a thousand dollars a year, it can have a significant cumulative effect over the course of your working life. Finally, no matter how much you are being paid, if you spend over that amount, you will never get ahead.
  2. Pay off Credit Card Debt - Debt from credit cards is the number one obstacle that keeps people from getting ahead financially. The ease of use and the ability to forget that its real money we’re dealing with is why so many people automatically use a credit card, without thinking of the bill at the end of the month. No matter how good our resolve is to pay the balance off quickly, in reality we often don’t, and therefore pay far more for things than we would have paid cash in the first place. 
  3. Stick to a Budget - Budgeting is often thought of in a very derogatory way, but it shouldn’t be. There is no way to know where your money is going if you don’t budget, and no way to set spending and saving goals if you don’t know where your money is going. A budget is an important piece of the financial puzzle no matter what your income is.
  4. Have a Savings Plan - It is a simple rule that pays to stick to: Pay yourself first. If you don’t, then all of your other financial obligations will be met, and chances are you’ll never have a healthy savings account or investments. It is a good idea to set aside a minimum of 5% to 10% of your salary for savings before paying your bills, or better still, have money automatically deducted from your paycheck and deposited into a separate account. 
  5. Contribute to a Retirement Plan - If you are offered a 401(k) plan from your employer, and you are not using it, you are not utilizing one of the best deals out there. Make a point to check with your employer as soon as possible to find out if the company has a 401(k) plan or something similar, and sign up for it before the end of the day. If you’re already contributing, do what you can in order to increase your contribution, and if your employer doesn’t offer a retirement plan, do some research on IRAs. 
  6. Invest - If you are putting money into a retirement plan as well as a savings account, and you still can manage to put some money into other investments, all the better. 
  7. Maximize Your Employment Benefits - Employment benefits like 401(k) plan, medical and dental insurance and flexible savings accounts, are all worth a lot of money. It is wise to make sure you are maximizing all of your benefits, and taking advantage of the ones that can save you money by reducing taxes or out-of-pocket expenses. 
  8. Review Your Insurance Coverage - Often, people can be talked into paying too much for life and disability insurance, as you are convinced that you should add them onto car loans, or perhaps you are buying whole-life insurance policies when term-life makes more sense, or you are sold on buying life insurance when you have no dependents. While it is important to have enough insurance to protect your dependents and your income in the case of death or disability, it is just as important to know what you are buying before you sign the dotted line. 
  9. Update Your Will - If you are among the 70% of Americans who don’t have a will, listen up.  If you have dependents, no matter how little or how much you own, you should have a will. If your situation isn’t overly complicated you are welcome to check out do it yourself software such as WillMaker from Nolo Press and write your own will. However you choose to get it done, it is very important to protect your loved ones by writing a will. 
  10. Maintain Good Records - If you don’t keep good records on your financial issues, you may not be claiming all of your allowable income tax deductions and credits. It is a good idea to set up a system right now, and use it all year. Putting something in place now, is going to pay off at tax time, so you are not scrambling to find everything you need at the last minute, making it likely that you’ll miss items that might have saved you money.

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