How To Keep Debt Low

By Jean Folger AAA

Rising prices are often blamed for debt; however, today's families spend just 7.5% of household income on food, down from 21.5% in 1960. Similarly, clothing now accounts for 3.4% of income, versus 8.8% in 1960. Efficient manufacturing and cheaper imports have brought down or stabilized these costs over the last five decades. Other key areas of spending including housing costs, entertainment and transportation, remain close to 1960 levels as a percentage of income.

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Despite these statistics, the typical American household carries about $21,000 in outstanding debt including automobile loans, student loans and credit card balances (this figure excludes mortgages). By comparison, the figure was just $1,132 in 1960. Incomes are rising at a slower pace than spending, suggesting that people are saving less and spending more – often using credit cards to delay paying for goods and services they could not otherwise afford.

While Wall Street cheers when consumer spending is up – it is, after all, good for the economy – it is not always a good thing for the consumers themselves. Aside from the financial repercussions of debt, people who have significant debt can suffer from "feelings of loss of control, anxiety, and other mental and emotional distress," according to a 2008 poll conducted by the Associated Press-AOL and analyzed by Paul J. Lavrakas, a research psychologist from the Ohio State University. Even though debt makes people feel bad, many still continue to accumulate more things and more debt. Keeping debt low to begin with is the best defense for avoiding debt and its financial, physiological and psychological consequences.

SEE: How People Fall Into A Debt Spiral

Just Say No (to Debt)
Where debt is concerned, the best defense is a good offense. Avoiding situations that will lead to debt is critical. While this sounds obvious (and it is), debt can slowly creep up because of bad spending habits and recurring monthly expenses. Making careful decisions about how money is spent can reduce monthly expenses and limit or eliminate debt.

Housing
Since housing expenses consume a significant portion of income, settling realistic goals and budgets is vital. A typical mortgage, for example, is a monthly expense that continues to exist for roughly 360 months. Finding a house at the lower end of your budget can free up money each and every month for 360 months (assuming a 30-year mortgage). Likewise, renting within a realistic budget puts money in your pocket every month. The 2008 financial crisis – caused in part by deceptive marketing and lending practices – put an end to "easy" mortgage money where lenders gave borrowers larger mortgages than they should have ever signed for. Even still, just because a person qualifies for a certain mortgage doesn't mean they have to buy at the top of their budget.

Recurring Monthly Expenses
Some monthly expenses are unavoidable, but many can be reduced by canceling an unnecessary service or calling customer service and asking for a better rate. Cell phones, and their data and text packages, for example, add up to a significant monthly bill for many people. The mobile phone company will not, however, let you know about better deals – unless you call and ask. Likewise, cable and satellite providers and other utilities including home phone lines may have better rates if you call and ask about any new promotions. In certain cases, bundling utilities can provide significant savings.

Consider canceling subscriptions that are rarely used or that are not worth the expense. The savings from canceling even one of these subscriptions can add up over time.

Insurance
Insurance policies – including those for health, home and automobile – are a vital part of protecting oneself against risks. While these policies are important and should not be dropped in an attempt to limit monthly expenses, the policies can be reviewed for cost-saving options. Has your commute to work changed (or maybe there is no commute anymore)? Your auto premium may be reduced – call and ask. Have you added a home security system and dead-bolt locks? You may be able to reduce your home owner's insurance premiums – call and ask. Are you generally healthy and rarely see a doctor? Consider raising your deductible or changing to a major medical policy to trim down monthly premiums.

SEE: How is my insurance premium calculated?

Entertainment & Food
Many people can save money by properly budgeting for entertainment and food (particularly when eating away from home). Daily lattes, lunch with colleagues and after-work drinks can add up to thousands of dollars each year. Keep in mind that many of these expenses are typically paid for with a credit card. If the card is not paid off in full each month, interest will, in effect, increase the cost of these unnecessary expenses. Imagine, for example, that someone charged $400 worth of lattes and lunches on a credit card during one month. If he or she makes the minimum monthly payment of $15, it will take 35 months to pay off that $400 and they will pay around $114.68 in interest. That latte just got pretty expensive.

If this spending continues month after month – without paying off the credit card – it is easy to pay thousands of dollars in interest over the course of many years before the lattes are paid off. Naturally, this applies to all credit card expenses, but entertainment and extra "treats" like specialty coffees are often areas where individuals can curb spending – if they put their minds to it.

SEE: Understanding Credit Card Interest

Just Do It
There are many individuals and families who have already cut every last cent of extra spending out of their budgets, and simply cannot reduce spending any more. For others, however, planning for and implementing a budget that will help you live with little or no debt is feasible. It involves sacrifice (like giving up the lattes and brining a mug of coffee from home instead), a strategy (such as bundling utilities and changing deductibles) and research to find the best deals. Just like dieting (think: "it's easy to lose weight…just eat less"), avoiding debt is easier said than done – but achievable for many people who take a proactive approach to controlling expenses. There is a lot emphasis today on paying down debt, but those lucky enough not to yet be burdened by debt can take the offense – and avoid getting into debt in the first place.

Conclusion
It should be noted that any decisions to change or reduce services should be carefully thought out. It may not make sense, for example, to save $2 a year in exchange for raising an automobile deductible by $500. Even though reducing expenses is important, it should be approached with logic.

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