I started last year with over $3,000 in credit card debt. Depending on your own experience with credit cards, that may sound like a lot or a little to you.
Either way, you can probably understand why one of my New Year’s resolutions last year was to become debt free in 2012. It really is no fun having debt, and I would actually even go out on a limb and say credit card debt is the least fun kind of debt to have.
So… how’d I do? Pretty well! I was able to pay off my entire credit card balance and reached my goal in July of last year.
But as soon as I had paid off my debt, I ran into a new problem. It was hard to maintain the good financial habits I had developed once I knew that my debt was gone! These habits included:
These were the habits that helped me pay off my credit card debt quickly – even faster than I expected – and it felt good to know that my behavior changes had helped me reach my goal. Which is why I found it troubling that these habits started fade away once I became debt free.
The truth is, getting rid of debt is an extremely urgent goal. It’s also very hard to ignore. Those two things made it easy for me to stay focused and commit to the habits listed above. Once I was out of debt, the urgency and the focus were not there anymore. I started to feel more positive about my finances (which is good) but that positive feeling lulled me into ‘easing up’.
I stopped using my budget spreadsheet for awhile. I went back to buying lunch out of the office everyday. And I no longer looked for ways to make extra money.
After reviewing my progress (or lack thereof) for the last few months as part of my preparations for the New Year, I identified several practices that will help me get those good habits back. Hopefully these can help you as well, no matter what your goal is:
1. Create a goal: There really is nothing like a goal for providing motivation. In fact, I think there is something about our human psychology that requires this type of focus on a single objective to create any lasting behavior change. So… what’s my goal? I’ve decided that I want to save at least 20% of my take home pay this year.
2. Envision your future: Your goal will be more powerful if it is associated with a vision of where you want to go. For me, the long-term vision that motivates me is having financial security, which means an emergency fund of at least $12,000-$15,000 and to eventually have some measure of financial independence, which means enough money saved up to retire early (I know that’s a reaaaally long term goal).
3. Have monthly targets: In addition to your main ‘big picture’ goal, you need monthly targets. These will show you whether you’re on the right track and they help you maintain that sense of urgency every month. In my case, the monthly targets are to save 20% of my take-home income each month and to know exactly how much I spent each month.
4. Allow yourself small rewards: One of the things that tripped me up after getting out of debt was that I really wanted to reward myself for accomplishing that major goal, and that resulted in some additional spending. The problem wasn’t that I spent a little extra for one month, it was that I continued to spend a little extra. That’s why you do need to give yourself rewards (i.e. one dinner out or one trip to the movies – whatever makes you happy). The trick is to enjoy those nice things and to look at them as special treats rather than things you can do all the time.
5. Spend time with like-minded people: It may sound strange, but you are who your friends are. Research has shown over and over that we tend to act in ways similar to those around us. If you’re spending time with people who don’t have financial goals and/or who like to spend well above their means, you’re going to have a difficult time sticking with your plans because you’ll be trying to ‘keep up with the Joneses’. On the other hand, if you spend more time with people who share your financial goals, it will be easier to stay on track.
For anyone who is still working on paying off their own debt, please check out our Credit Card Debt resource center, our Student Loan Debt resource center, and our Debt Consolidation resource center. And anyone can get some great tips from our Budgeting Tips resource center. If you’re looking for a community of like-minded people as you pay off debt in 2013, don’t forget to check out the Debt Movement where we’re trying to pay off $10 million in 90 days together!
Benjamin Feldman is a personal finance writer for ReadyForZero, a startup company that is helping people pay off debt with their free online tools. You can follow him on Twitter @BWFeldman and at the ReadyForZero blog.
Do you ever feel like you are trying to keep up with the Joneses? It seems like everywhere I turn, a big purchase is happening to someone I know. A massive 3 story house, nice cars, fancy vacations, a new iPad every other month and everything else.
When a friend goes out and buys the next greatest phone or buys a new car every couple of months, it kind of makes you wonder, and maybe it makes you jealous?
I’m not going to lie, the jealous monster takes over my life every now and then. This is something that I am working on and something that I need to change in my life. Am I the only one? Sometimes I feel like I’m the only person who is jealous and no one else has these crazy feelings. Since my extra income seems to be continually increasing, sometimes I feel the urge to spend it.
Maybe the jealous monster has taken over your life as well and you are trying to keep up with the Joneses.
We know someone who isn’t showy with his money, he is careful with how he spends his money. He doesn’t buy all the latest gadgets that don’t mean anything to him. Instead he spends money on his family, vacations, making his house into a home, family gatherings at his home, and other things that truly mean something to him.
He is the perfect example that just because you “might” have money to spend, it does not mean that you should. Buying all of the newest things all of the time doesn’t always mean everything in life.
The other day my friend asked me at dinner what she should do in order to build her credit. Her boyfriend and her are looking to buy a house soon since they’ve lived in an apartment together for 3 years and want something of their own.
They are very responsible with their money, but have always paid for everything with cash. They have one credit card, and the limit is only $300, so she doesn’t have much to help her build her credit.
I then of course talked away about the numerous things she should or could be doing. I love spewing out lots of random financial knowledge
My credit score is a little under 800 right now. I hate that I am always thinking about my credit score and I let my life revolve around it, but I just want that number to be as high as it can get.
However, lately I have been guilty of signing up for credit cards for the rewards. Right now I have 3. But I don’t really care if my credit drops a little, because I don’t need credit for anything right now (I already have a house and cars). Also because my score won’t drastically drop by signing up for new cards. Does anyone advise against what I’m doing?
And then I thought some of you would probably want to know about it also! So that’s where we are today.
[Edited this sentence after realizing that others were not reading it the way I was trying to say it, sorry for the confusion] Having a good credit score can be useful in life. Unless you plan on paying for a house, cars, etc, all in cash, then credit is pretty much needed for these. A credit score allows banks and companies to gauge your riskiness to them.
1. Get a credit card. Only do this if you can trust yourself. A credit card can be a great tool if you want a good credit score. However, it can also lead to MANY bad things if you aren’t careful. So please don’t get a credit card unless you can use it responsibly. There are other ways to get credit if you aren’t going to be responsible with a credit card.
2. Keep your utilization rate low. Keeping your balances below 30% of what you can borrow is important. For example, if your credit card limit is $1,000, try not to have a balance over $300. This is the main thing that I try doing and your utilization rate has a big impact on your overall credit score.
3. Average account age is important. If you have a credit card that you’ve had for MUCH longer than others, I would recommend keeping it if there are no yearly fees, etc. that would otherwise make you want to close it.
You also don’t want to open up too many new accounts too quickly. Your riskiness is also based on what your average account age is. So if most of your accounts are relatively new, that will not look the greatest to your potential lenders.
4. Pay your balance off every month and on time. It’s very important to pay your bills on time. Even if you have a low credit score, many banks will ask to see if you’ve ever been late for other payments such as your cell phone or utility bills in order to see how risky you are.
When we began looking for houses a couple of years ago, we had a low credit score, mainly because we were young and had not really thought about credit. We paid for nearly everything with cash. BUT, we had lived together for 2 years already, so we had a lot of bills that we were paying. Our lender asked us to give them proof that we had paid all of our bills on time. Because of this, we were able to secure our house loan and were approved.
5. Check your credit report. Make sure that there is nothing on your report that shouldn’t be there. This is really important! There are often mistakes on credit reports and unless you say something, they will stay on there.
I made a post last year on checking your credit report and the steps. Check it out! Below is a short summary of what I wrote.
Here’s what to do when you find an error:
- You should be constantly checking items on your credit report, ESPECIALLY if you are like me and things like this keep on happening. I am “subscribed” to a credit reporting agency and I check mine every month.
- When you eventually do find an error, contact the credit bureau where you found the error. You can call (to get more information on it) but make sure that you write. When you write, then include the date, your name, address and the problem.
- If there is an error with more than one credit bureau, then do the same thing for all 3 credit bureaus.
- Include a copy of your credit report and the page that has the error (make sure you don’t include any originals of anything). Originals should of course stay with you.
- Include your proof that this is not you. It was VERY hard for me to find proof that the house wasn’t mine. How was I supposed to prove that? I WAS 13. Who the heck remembers what they were doing on an exact day when they were 13? I was probably at school when I allegedly bought this house.
- And then wait for a response
6. Be responsible. I want to say this again. Make sure that if you do decide to open a credit card in order to build credit, that you are extremely responsible. If you don’t think you’ll be good with a credit card, then there are other ways to build credit as well.