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How to Avoid Financial Trouble in the Future

Updated on August 1, 2011
Avoiding Trouble
Avoiding Trouble | Source

One of the easier things in life to do is to get in financial trouble. Most of us have been there one or more times. Had we been really well trained in financial matters we might have avoided much financial pain. But it takes more than knowledge, though. It also requires self-discipline. Here are a number of strategies to help avoid financial trouble in the future.

Live Within Your Means to Avoid Financial Trouble

Live within your means by never spending more than you make. You must make and follow a budget that begins with your net income. That is net of all deductions including payroll taxes. Construct a detailed monthly budget based on your monthly net income, listing all fixed obligations and variable spending categories.Search online for budgeting tools if necessary.

Plan to Consistently Save or Invest a Proportion of Your Income

Make sure that you include in your budget provision to pay yourself first. Ideally, 10% to 15% of your income should be set aside for retirement.You might need to save more in addition to retirement if you have other goals.

Cut Your Household Expenses

Review your budget to see where you might be able to trim expenses. A dollar saved is like $1.25 earned because of taxes, so cutting expenses is powerful. Contact your electric utility and investigate other resources to help you target areas where you can cut your household expenditures.

Save Money on Car Purchases

Plan to never buy a new car, only used ones. The case for buying used cars and not spending more than $10,000 on a vehicle is very strong if you need to reduce your spending and limit new debt.

Work on Eliminating Your Debts

Get out of debt and stay out of debt. Excluding a house, pay only cash for all your purchases. If you don't have the money to buy something you want then save up for it. But don't go into debt to buy it. Get rid of all your credit cards except one for emergencies. Don't use it unless you have a genuine emergency. Wanting to buy something is not an emergency!

Save What's Needed for a "Rainy Day"

Build up savings for a "rainy day" or emergency such as losing a job or having income significantly reduced for a period of time. This fund should equal the amount you would need to live on and keep all your obligations current for six months with no income. This is a critical part of a person's or household's financial plan.

Put Yourself in a Position to Avoid Future Financial Trouble

Once you are free of debt except for your primary mortgage, have accumulated your six-month expenses savings fund, and are saving 10% to 15% for retirement, you are in a great position to avoid future financial trouble. As Ben Franklin so wisely said, "An ounce of prevention is worth a pound of cure."

If you are currently in extreme financial distress and cannot see a way out of it, contact a certified financial consultant for help.


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