The Hippo


Jul 24, 2019








Avoid the debt threat
Tips for maintaining a debt-free life

By Angie Sykeny

 According to the U.S. Census Bureau’s most recent survey of household debt (2011), 69 percent of U.S. households held some form of debt, with the median debt amount at $70,000. It only takes one big event, such as a serious illness or injury, weather or fire damage to a house or a lost job to send even a financially stable person into an exponential debt trap. 

Michael Solari, principal of Solari Financial Planning in Bedford and Nashua, talked with the Hippo to offer a few tips on how you can protect yourself from falling into debt. 
Solari defines debt simply as being unable to financially meet your living needs. The demographic most at risk for debt, he said, is recent college graduates just starting out in their careers, because many have significant student loan payments, and entry-level job pay often isn’t enough to cover both the person’s living costs and loan payments. For others, debt can happen quickly as the result of an unexpected life event, or over time as the result of continuous irresponsible spending habits. That’s usually when people turn to credit cards. 
“It’s one thing to overspend one month and rebound, but when there’s a trend where each month you’re putting more on the credit card, that’s a red flag,” Solari said. “Credit card debt accumulates really quickly, especially with high interest rates, so usually people don’t even realize they’re in trouble until it piles up and they can’t pay their living expenses or their credit card expenses.” 
Serious debt can precipitate some long-term consequences that are very difficult to reverse. Some people may choose to sacrifice their property or retirement savings to avoid bankruptcy. Those who do file for bankruptcy are forfeiting their privacy and independence as well as putting a monumental blemish on their credit scores, which can considerably limit their future plans. 
So, what can you do to steer clear of debt altogether? Solari said setting up a budget is the best place to start. 
“It’s about being proactive and understanding where your money is going,” he said. “If you set up a budget and review it, you can decide if what your money is going towards is worth it or if it should be going elsewhere. Then, [implement] an action plan for what you want to do.”
Solari recommends using personal home budget software such as You Need A Budget. A budgeting phone app may also be useful so you can refer to your budget on the go and make informed spending decisions, then update your budget instantly when you spend money. 
Another way to protect yourself from debt is to prepare for the worst. 
“The number one mistake I see people make is not setting aside an emergency fund, or not setting aside enough of an emergency fund,” Solari said. “When some kind of big event happens, you don’t have time to start reviewing your spending habits, and before you know it, things start piling up. And for people who make really good money, it’s hard for a lot of them to make that seismic shift [to stricter] spending habits.” 
A sufficient emergency fund, he said, should have enough to sustain you for five to six months. The best method is to set up an automatic transfer so that an amount of your paycheck goes directly into a savings account. Then, just forget about it and let your emergency fund build up. 
Solari’s final tip for avoiding debt is to do your research on credit cards before you apply. Look for cards with no transfer fee and little or no interest or yearly fees; those perks can give you the breathing room you need to bounce back, should you start falling into debt. 
If you are already in debt, there are financial counselling resources like the National Foundation for Credit Counseling or software like ReadyForZero, which can help you develop a plan to attack your debt a little at a time. But more important than the strategies to escape debt are the strategies to stay out of debt. 
“It’s not solving the issue if you still can’t meet your necessary expenses without relying on a bonus or retirement or whatever,” Solari said. “That’s why it’s so important to have a plan and understand where your money is going.” 

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