Recently Got Yourself Out of Debt? 7 Steps to Help Stay Out of It
Achieving freedom from debt is a milestone that brings a sense of relief and accomplishment. However, the journey doesn’t end there. Maintaining that freedom requires a proactive and strategic approach. Here are seven steps to help keep you out of debt, especially if you’ve already navigated the ups and downs of managing your finances over the years.
1. Embrace a Budget That Reflects Your Current Lifestyle
Budgeting is not just about tracking expenses; it’s about aligning your spending with your values and priorities, including debt management. Create a budget that reflects your current lifestyle and financial goals.
This budget should include all sources of income and all expenses, with a clear distinction between necessities and luxuries. Regularly revisiting and adjusting your budget helps keep it relevant to your life so you can avoid unnecessary debt.
2. Build and Maintain an Emergency Fund
An emergency fund acts as a financial buffer that can save you from falling back into debt in the case of unexpected expenses such as medical bills, home repairs, or sudden loss of income. Aim to save enough to cover at least three to six months of living expenses. This fund should be easily accessible but not so easy that you feel tempted to dip into it for non-emergencies.
3. Understand Good Debt vs. Bad Debt
You may find it helpful to distinguish between “good” and “bad” debt. Good debt would be an investment that grows in value or generates long-term income, such as a home mortgage or student loan.
Bad debt, on the other hand, would be borrowing money to purchase depreciating assets or for things that don’t provide financial return. Think: high-interest credit card debt.
Distinguishing between the two can help you make informed decisions about borrowing and spending.
4. Prioritize Paying Off High-Interest Debt
If you have any remaining debts, prioritize them based on their interest rates. High-interest debts can snowball and trap you in a cycle of debt repayment.
Tackling these debts can reduce the interest you pay over time and free up more money to save or invest.
5. Redirect Freed-up Funds into Retirement Savings
With debts paid off, the money that once went to monthly payments is now available to bolster your financial future. Seize this opportunity to increase contributions to your retirement savings, such as your 401(k) or IRA.
Contributing more to these accounts can help increase compound growth over time while taking advantage of the tax benefits these retirement accounts offer. This strategic move helps ensure that the funds once dedicated to eliminating debt now work toward your financial comfort in retirement.
6. Regularly Review Your Insurance Coverage
Adequate insurance coverage can help protect against significant financial losses that may otherwise derail your finances and push you back into debt. Ensure you have appropriate coverage for health, home, auto, and life insurance. Consider buying insurance to help protect against the financial repercussions of long-term care.
Review your insurance coverage at least annually, or sooner to reflect changes in your life. That way, you can make sure your insurance continues to meet your needs.
7. Work with a Fiduciary, Fee-Only Financial Advisor
Finally, consider partnering with a fee-only, fiduciary financial advisor. A fiduciary advisor is legally obligated to act in your best interest, providing unbiased financial advice without the conflict of interest associated with commission-based sales. A fee-only advisor does not earn commissions from selling products, helping to ensure that their advice is tailored to your financial goals. Such a partnership can help you develop a comprehensive financial strategy that includes debt management.
At Parkshore Wealth Management, our comprehensive wealth management services include debt management to help clients achieve and maintain financial freedom. As fiduciary, fee-only advisors, we believe in empowering our clients with the knowledge to make informed financial decisions without the pressure of sales or product promotions.
Final Thoughts
Staying out of debt is about more than watching your spending. It involves a holistic approach to managing your finances, investing in your future, and making informed decisions that align with your priorities and goals. By adopting these steps, you can help maintain your financial freedom and enjoy the peace of mind that comes with it.
Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.