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Best Ways to Stay Out of Debt in your 30s

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Here are the ten best ways to stay out of debt in your 30s.

  1. Create a Budget
  2. Set Financial Goals
  3. Never Spend More Than You Earn
  4. Pay Off Your Debt
  5. Save Money in an Emergency Fund
  6. Save Money in a Rainy-Day Fund
  7. Improve Your Credit Score
  8. Invest for Your Retirement
  9. Save for Medical Costs
  10. Save for Big Purchases

Below, we will go into detail about how you can use each of these tips to help you stay out of debt. 

Create a Budget

One of the first things you need to do to stay out of debt is create a budget. Whether you are debt-free or looking to get out of debt, this is essential. Creating a budget is much simpler than most people think, but it does take time.

Follow these simple steps to create your budget:

  1. Schedule a day to devote to creating a budget.
  2. Print out any bank statements from the past few months to a year.
  3. Collect all the receipts that you can.
  4. Record your income. Are you paid every week? Every two weeks? Every month? Does it stay the same, or does it vary?
  5. Add up all your expenses. Again, it is best to do this in categories.
    • How much is spent on living expenses? These include rent or mortgage, utilities, food, etc.
    • What about the money spent on wants? These include things you purchase because you want them, not because you need them—for example, a new iPod or some books.
    • What are you spending on entertainment? This includes eating out, going to movies, shows, concerts, etc.
    • Add any miscellaneous expenses not covered above.
  6. Once you have all your expenses, compare them to your income. Are you spending more or less than you are making?
    • If you are spending more than you are making, you need to cut back on wants, entertainment, and miscellaneous expenses.
    • If you are spending less than you make, look at how much less you are spending. Can you cut back and save even more?

Set Financial Goals

Now that you’ve made a budget and found some money, it would help if you decided where to put that money. This means you need to make some goals.

https://www.nbcnews.com/better/business/6-smart-money-moves-make-your-30s-will-pay-down-ncna849616

Here’s the key to a good goal make it SMART.

SMART is an acronym meaning Specific, Measurable, Attainable, Realistic, and Timely. 

Specify your goals

Ask yourself the following questions:

  • How much will I need when I retire?
  • How much will I need in an Emergency Fund?
  • How much will I need in my Splurge Fund?

We will cover Emergency Funds and Retirement Funds below. A Splurge Fund is a checking account or savings account devoted to money you can use for wants and entertainment. This fund is important as cutting off these sorts of expenses ultimately can be challenging for some people. The Splurge Fund allows for the occasional purchase of a want.

Create measurable goals

A measurable goal allows you to adjust as needed to reach your goal. To check if your goal is measurable, ask yourself this question: can I create smaller goals within my larger plan?

An Example: Your Goal is to save $6,000 in your emergency fund in one year. 

Your smaller goals might be to save $500 a month or $1000 every month. You can even have the halfway mark of $3,000 in six months. However you break it down, make sure to set a date to check in with your goal throughout the year.

You need an attainable goal

An attainable goal is one you can take action to reach.

Looking at the budget you made, how much extra do you have each month? Do you need to get out of debt first? Do you need to split the money among a couple of different things? Make decisions and set them in motion.

It is recommended by most financial advisors that you try to save money and pay off debt simultaneously. However, if you must choose, pay off the debt first. Then, start saving.

Make realistic goals

A goal is realistic when it is one you can reach. You do not need the goal to be so easy that you reach it immediately. On the other hand, you also do not want it to be so hard that you struggle to reach the smaller milestones. 

For instance, you found an extra $400 to use when you did your budget. You think you could save $100 more by cutting expenses. However, that would mean giving up a social life and dinner out with friends. 

Instead of trying to cut back more and remove things that bring you joy, focus on the $400 you do have. Use that to pay off debt and begin saving.

If you are debt-free, divide the $400 into each type of savings account that you want. For example, put $100 to the Rainy-Day Fund, $100 to Retirement, $100 to the Emergency Fund, and $100 into a Health Savings Account.

All your goals should have deadlines

Goals are no good unless they have a deadline. For instance, a Retirement Goal has a deadline of 30-40 years if you are in your 30s now. A closer deadline might be to fully fund your Emergency Fund within a year (or two, remember to be realistic).

Never Spend More Than You Earn

This one is one of those commonsense things that many people overlook. If you want to stay out of debt, do not spend more than you earn.

Spending more than you make will always lead to debt. This is why an Emergency Fund is so critical. These savings accounts allow for unexpected or surprise events that cost more than you have on hand.

Pay Off Your Debt

Another commonsense idea that needs to be said is to be debt-free, you need to pay off any debt you have. If your debt was included in your budget and you still have some leftover for saving, then make those financial goals and start saving. However, if you must pick between saving and getting out of debt, get out of debt first. 

Getting out of debt first is so important because most debt has a higher interest rate than most savings accounts. Even retirement accounts can rarely make more. So, pay off that debt because the interest rate is a killer.

Save Money in an Emergency Fund

To avoid debt, make sure you have an emergency fund if costly things happen. For example, if you lose your job or go on leave for an extended time for medical reasons, you need an Emergency Fund. 

An Emergency Fund should be a minimum of six months of expenses. A year’s worth of expenses is best. If you are starting your fund, shoot for six months. When you reach six months saved, then move on to saving for a year’s worth.

Save Money in a Rainy-Day Fund

A Rainy-Day Fund is for significant expenses that happen occasionally and maybe a surprise. These include needing a new car, a new computer, and other such costs. A Rainy-Day Fund is a good start if an Emergency Fund seems too big a reach. Although Rainy-Day Funds can have any amount, a couple thousand is a good starter goal.

Improve Your Credit Score

The good news is that if your budget, make financial goals, pay off all your debt, and make rent payments on time, your credit score will improve. An improved credit score will make you eligible for better rates on credit cards. These better rates make it easier to stay out of debt. Just make sure not to spend more than you can pay off each month.

Invest for Your Retirement

Investing in your retirement now will help you avoid debt later in life. Once you have paid off your debt and funded your emergency funds, put all extra money towards retirement accounts and save for medical costs later in life. If you can, you can also fund your retirement concurrently with your Rainy-Day Fund and your Emergency Fund.

https://www.businessinsider.com/personal-finance/financial-changes-now-help-me-retire-early-2021-11

Save for Medical Costs

As people get older, their medical bills go up. Keep this in mind and begin saving for medical expenses that may hit you in your last years of work or after you retire. You can use a regular savings account or go with a Health Savings Account (HSA).

Save for Big Purchases

To stay out of debt, save for any planned significant expenses. If you know you want or will soon need a new car, plan for it. If you want a house, plan for it. The more you can save towards these goals and big purchases, the less you will have to finance them. The less you finance them, the sooner you can pay off that debt.

Image Credit: Steve Stark

What Types of Debt Affect Your Credit Score? It’s Not Just Your Credit Cards

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Staying informed about your credit score is important. You can easily track your debt while ensuring your financial information is always safe. However, understanding your credit score and how it can change can be confusing. 

Misinformation and a lack of education regarding financial literacy can significantly impact your debt management abilities. For example, you might think only your credit card activity determines your credit score. However, your credit score is more than that; your debt accounts for 30% of your credit score.

Having a little bit of debt history is fine, as it lets lenders know whether you pay back what you owe. This also establishes that you were approved for some credit at some point. It is difficult to get more substantial loans and credit amounts for large purchases without an established debt pattern. 

The critical thing to remember about debt is that there is no problem having it, but there needs to be an effort made to pay down your debt.

You do not want the debt just sitting there collecting interest. Failure to pay will affect your credit score in a bad way, no matter where the debt came from. 

Different types of debt can affect your credit score. Understanding these types of debt and how they relate to your financial situation can ensure you take the proper steps to manage your debt and improve your credit score. 

Loans 

Regardless of where you get it from, a loan will show on your credit score. A loan may be taken for a few reasons. First, it is considered installment debt, as you take a large sum and pay it off in small payments. Typically, there will be a minimum amount you have to pay against your principal each month. 

Interest will also be charged on the amount you owe back for your loan. For most loans, there is a fixed percentage of interest. Your credit history is one of the factors that will determine how much interest you must pay. Furthermore, it determines your approval for a loan. 

Car Loan and Mortgages

Interest rates are usually lower for car loans or a mortgage because the lender has less risk. For example, if you were to miss any payments or fail to pay your auto loan or mortgage, the lender would take back the property. 

Other Types of Loans

For loans such as a student loan or a personal loan, there is nothing that the lender can take from you to pay themselves back. Therefore, giving you this loan is more of a risk for the lender. This is partially why the lender will review your credit history and potentially give you a higher interest rate. 

How Loans Affect Your Credit Score

If you make your monthly payments on time towards your loan, it will positively affect your credit score. In addition, these payments show that you are responsible with your debt and actively have the funds to pay towards your debt. 

Missing a payment once or twice most likely will not hurt your score, provided you try to make up the payment as soon as possible. However, making a habit of missing payments or making late payments can impact your credit score. This is because the company or financial institution you owe money to will report missed payments on your credit history. Your score goes down when this happens. 

When it comes to getting a loan in the future, if you have a history of missed payments that you do not try to make up or you default on a loan, you run the risk of getting denied. 

Charge Cards

Charge cards are not as common as they used to be. They are also much harder to get than other types of credit. A charge card will let you make purchases that you pay for in monthly increments. They will usually have a limit, but that limit can fluctuate. 

The debt that you incur on a charge card is considered unsecured, which means it is a high risk for lenders to approve you for these. They can also have higher interest rates than other types of credit and penalties if you fail to pay your monthly amount on time. 

Medical Bills 

Depending on where you live and if you have any insurance, it is possible to garner medical debt in the case of medical necessity. If you cannot pay your medical debt off right away, you can potentially arrange a payment plan that splits up payments into smaller increments. Click the link below to learn more.

https://www.cnbc.com/select/how-long-does-medical-debt-stay-on-your-credit-report/

If you miss payments towards your medical debt, the medical facility may turn that debt over to a collection agency. If it gets that far, it could have a significant impact on your credit score. You would have to be dormant on payments for quite some time before that happens. 

Furthermore, when medical debt is turned over to a collection agency, there is often a waiting period between when it is turned over and when it shows up on your credit report. Because of how these debts are incurred, it allows you to have more time to set up a payment arrangement that works.

Debt Consolidation

Many banks or financial institutions offer debt consolidation loans. These loans essentially allow you to pay off multiple types of debt.

Once those debts are paid, you will then owe the consolidating lender. These loans work like most loans, where you have a monthly payment plus interest and a fixed term to pay it back in. 

While this can be an excellent option for getting a good handle on debt, doing so can have a small impact on your credit score. It affects your credit score because a credit report will need to be pulled to determine whether you are eligible for one. 

It also affects your credit score because you reduce your credit utilization. Utilization is how much credit you have available versus what you are using. 

The only solution for those in an unmanageable financial solution might be filing a consumer proposal or bankruptcy. It could be a necessary solution for your financial situation, but it will lower your credit score substantially. Thankfully, once you manage your debt, there are many ways to build it back up smartly. 

Bills 

When you purchase items like a cell phone or internet plan, you may not realize that your credit score is checked before being approved for these items. It happens because the issuer wants to know you can pay your bills. 

If you fail to pay these bills, the issuer will submit this history to your credit report. Once again, a more extended history of missed payments will be sent to a collection agency. Alternatively, a propensity for paying your bills in full and on time is excellent for your credit score. 

Opening and Closing Accounts Frequently 

It may be tempting to switch credit cards every time a good offer or incentive comes up. Therefore, it may seem smart to close an old card, so you do not have multiple that you’re tempted to use it.

However, having old cards or accounts open and showing a history of on-time payments on your credit report is good. 

When you continuously open new accounts or take on new loans, your credit score will reduce your credit age. In addition, the frequency of credit inquiries that will show on your report will also affect your score. To lenders, all this new activity will look a little dodgy to them. They may think you’re at high risk of mismanaging your debt. 

Having a few different types of credit opened, such as a credit card and a couple of loans, is good. This will tell potential lenders that you can handle multiple types of debt. Thus, they may not be as wary when it comes to lending to you. However, this is not to be incentivized to take on more debt than you can manage. 

Once again, being cognizant of your credit and your debt is essential to improving your financial situation. In addition, it can help you prioritize how you allocate your budget towards different types of debt. Finally, this awareness and some budgeting efforts on your end can help you improve your credit score.

After Bankruptcy, How Do You Repair Your Credit?

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Declaring bankruptcy is rough, but it is not the end of the world. With a little careful planning, you can re-grow your credit and build it up stronger than before.

However, it is going to take a little patience. In this article, we will talk about some steps to take to repair your credit as fast as reasonably possible.

Let’s explore some post-bankruptcy tips to repair your credit fast!

Don’t Make Any Career Changes Too Quickly

While changing jobs will not affect your actual credit score, it can come back to bite you when you are applying for any future loans or lines of credit.

This is because the agencies that decide if you are approved or not will generally factor in a report that concerns your employment.

What this means for you is that the financial entity will look at the last 24 months of your employment to ensure that you’ve been working long enough in one place. And thus, you are more likely to be able to repay them.

Changing jobs at this time is like shooting yourself in the foot. So, if you have any new business aspirations, then be sure to keep your current job. Then, you can build up those businesses in your free time – you don’t want to cost yourself any credit or loans you might otherwise be entitled to!

Keep Current on Non-Bankruptcy Payments

While filing for bankruptcy will close out most of your accounts, it does not cancel out every debt that you owe. Certain debts, such as alimony or student loans, will still have open accounts and will eventually need to be settled.

It is in your best interests to do this, and we recommend paying a little more than the minimum if you can. This is going to improve your debt-to-income ratio, and your credit is going to start climbing much more quickly than if you’d ignored these debts.

Make Sure That Your Payments Are Being Reported

While you are paying off those non-bankruptcy debts, you should determine who reports such payments to the credit agencies. While companies aren’t obligated to report that you are paying, it can really help you get out of the ‘bankruptcy hole’ when they do report this information.

You can also try to have things like rent and utilities reported to the credit agencies, check to see if that is an option, and then have it done. While these payments do not always factor in on applications, every little bit helps, so take advantage of it!

Apply for New Credit to Build Your Credit Score Up

You will need to apply for new credit, but you need to be careful about this by aiming low. This is because every time you apply for new credit, a check is run, which will be noted. That means that you will look like a ‘risky proposition on paper if you apply to everyone, and we want to avoid this.

So, target some credit options that will help you and that you are more likely to get. Examples of this include the following:

  • Gas cards
  • Credit-builder loans
  • Secured credit cards
  • Credit lines with favorite retailers

These options are much easier to get than an unsecured line of credit from a major provider. Therefore, start with one or more of these options so that you can start modestly and build yourself up from there.

When You Get New Credit, Keep Your Balances Low

Once you get new credit, you are going to need to exercise your powers of restraint. This means that you will need to keep your balances low so that you don’t hurt your shiny, new credit.

The best way to do this is to pay more than the minimum to keep new debts managed and reduce the amounts you will be paying on the accrued interest.

You should also set up autopay whenever you can. Autopay makes it easy since you won’t have to micro-manage your payments to know they are being made on time.

One strategy to help yourself pay more than the minimum is setting up multiple small payments throughout the month. That way, it feels like the ‘hit’ on your paycheck is less while you are paying MORE.

Remember, those interest rates on debt are calculated against the total that you owe, so paying a little extra now saves you from paying a whole lot of interest over a more extended amount of time!

Bankruptcy Is Not the End, So Start Rebuilding Now

Today, we’ve talked about the steps you need to take after bankruptcy to rebuild your credit. Remember, you don’t want to change jobs during this time, and you are still going to have some non-bankruptcy debts – so get a payment plan started to get those settled and keep them managed.

Make sure that creditors who are willing to report your on-time and early payments are doing so and apply for new credit but be humble about it so that you don’t make yourself look like a risky spender. Then, once you get that new credit, keep up with your new debts so that these new lines of credit can build you up over time.

We won’t kid you. It’s a long road to credit redemption, but with a bit of patience and the tips we’ve shared today, you’ll get there. You can count on it!

Image credit: [Steve Stark]