You know those tempting credit card offers launched usually in the months of November, December and January? That’s a whole industry banking on you needing to borrow money.
Studies have shown that people tend to go into debt for the holidays, from all those shopping and hosting family meals and not just on Dec 24, 25, 31 and January 1 but also all the days leading to them and in between.
If you entered the new year with some debt on your credit card, or a personal loan or two you had to sign up for, time to draw the line now and say no to any more debt.
Take it from Warren Buffett, who ranks high not only in my list of all-time great investors but also with Forbes, Bloomberg and Fortune among others. He offered this advice at a Berkshire Hathaway annual shareholder's meeting to a young investor: “Just don’t get into debt. It’s very tempting to spend more than you earn, it’s very understandable. But it’s not a good idea.”
Buffett is known for living within his means, and he may have taken it to a bit extreme as despite his personal fortune of over $100 billion, he lives in a modest house worth .001 percent of his total wealth and you won’t find any Porsche or Ferrari in his garage.
By not spending more than what he earns, Buffet has managed to build his wealth and keep it, through the global economic recession of 2007, the Russian financial crisis of 2014 and now the worldwide health pandemic from 2020.
How to avoid debt or more debt in 2022? Here are some money smarts that can help.
#1 Don’t buy what you can’t afford.
This goes back to Buffet’s example of living within your means. Stay away from “Buy Now, Pay Later,” or even “0% installment” offers because they only postpone debt. These offers make spending so tempting, and worse, buying things you can’t afford now and will likely regret later.
#2 Say no to wants and only yes to needs.
The Needs are simple – these are the things for daily survival that covers food, a roof over your head, simple clothing, medicines among others. Now the Wants are for almost anything that goes beyond survival needs like gourmet coffee, designer clothing, latest model for mobile phone and more. To keep track of Needs versus Wants faithfully, make a monthly budget and stick with it.
#3 Pay with cash, and leave your credit card at home.
With the pandemic, cash here does not mean hard cash but also digital cash. The point I am making is that it usually hurts more when you pay for anything with cash. The money leaves you – physically or digitally – right after the transaction. When shopping, take only the cash with you that you can afford to spend and make sure to leave your credit card at home so you have no back up plan.
#4 When that plastic ain’t really that fantastic.
Buffett’s advice to the young investor actually had a part two: “If you’re deep in the red, it may be a good idea to never look at a credit card the rest of [your] life.” Many borrowers that fell into a debt trap did so thanks to their credit card spending. They began to think that their spending limit is their credit card limit (wrong!) and started paying just the minimum payment on their credit card bills. The best way to stay on top of your credit card is to pay off your balances in full. If you can’t, consider transferring your balance to a lower rate card and no more spending until that’s paid off.
#5 If you must borrow, get the lowest interest rate.
No one really wants to go into debt, but there are times we can’t avoid it. Maybe to pay for an unexpected medical bill, or to fix a leaking roof. Whatever the reason, do not sign up for the first loan that is offered to you. Ask around for the lowest interest rate, and better if they waive application fees. Look into the penalty fees too as well as pre-termination fees and make an informed decision.
When I look back at the stories shared by people who went into debt, most of them said they could not stop themselves from buying things they knew they could not afford. It may feel like it is out of your control, but you can end it the spiral. Make 2022 the year that you don’t only get out of debt but also stay out of debt.
Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.