by Susan Paige
The best way to tackle debt is to avoid creating it in the first place. While debt can be a good thing if it’s tied to an asset that can generate money, we’re talking about ‘bad debt’—the type of debt that does nothing for you other than rack up some extra interest each month.
There are a range of circumstances that can lead to the accumulation of bad debt, but here are three of the most common scenarios and some simple ways you can avoid them.
- Unanticipated expenses
Unanticipated expenses are a budgets’ worst enemy. Whether it’s the result of the kids’ school books, uniforms or excursions costing more than expected, having to repair a broken oven or some dodgy plumbing at home, finding yourself with a utility bill that’s more expensive than usual, or needing to fork out for removalist fees to move house, most of us simply charge these expenses to a credit card with no real plan on how it’ll be repaid.
The solution here is to plan for the unexpected. When developing your budget, make sure you include a non-negotiable ‘miscellaneous expenses’ category and make regular contributions to it, so you can gradually build up a nice little sum of emergency cash for when the unexpected does inevitably occur.
It’s also a smart move to transfer any existing credit card debt to a low or no interest card (which you’ll of course cut up as soon as you receive it to avoid the temptation of putting any new charges on it) which will be easier to pay down. Then you can cancel your original card and start using a debit card instead—that way if you don’t have the money, you can’t spend it!
- Health issues
If you’ve never had any serious health issues before, you may not realise how much of a toll it can take on almost every area of your life, including your budget. At a time when you’re at your most physically and emotionally vulnerable, you may be faced with a mountain of medical bills, all while you may be unable to work.
While some health issues are unavoidable, most are. By adopting a healthy lifestyle which incorporates a nutritious diet and regular exercise, you can drastically reduce your chances of suffering from a long list of health issues.
Then you need to ensure your family is prepared for the worst in the case it does happen by taking out family private health cover and income protection insurance. While insurance will be an added expense on your budget, it’s far more manageable to pay a regular premium than deal with the repercussions of a serious illness when you’re not prepared for it.
- Car costs
Many of us treat our cars as assets because they hold monetary value, however because they depreciate in value over time (unless it’s a rare vintage car which could increase in value), we should really treat them as a liability.
If you can, avoid taking out a personal loan to purchase a car and save up the money to purchase it outright instead. While that may mean you can’t purchase a brand new vehicle fitted out with all the mod cons, it will ensure you only spend within your means. Just make sure you properly research the history of the vehicle and do the appropriate checks before buying so you don’t end up with a dud.
Accidents or unexpected break-downs can also be costly and send you spiralling into debt quickly, so make sure you maintain your vehicle and have it serviced regularly. It’s also a good idea to take out both accident and roadside assistance insurance so you’re covered if something does happen.