If you’ve recently been through debt settlement, you probably understand how overwhelming and nerve-racking the entire process is. It literally takes a toll on your mental health especially if the creditor isn’t very cooperative. On the other hand, you might feel relieved too because dealing with piled up debt is the last thing anyone would want for themselves. Debt settlement literally is like taking a fresh financial start where you finally feel like regaining your control over your finances. However, if you don’t have a solid plan after a debt settlement, it wouldn’t take much longer for you to fall back into the same financial pitfalls.
In a nutshell, after debt settlement, you should feel the motivation to take good control of your finances and show responsible behavior because let’s face it? You wouldn’t want to go through the debt-trauma all over again! Today we are going to explore some practical strategies that’ll help protect you from falling into debt again.
Starting with;
1-Find The Root Cause Why You Ended Up In Debt
The best way to avoid falling into debt again after a debt settlement is to figure out why and how you ended up in that place. You must reflect on the root cause of your debt. Self-awareness is the first step when you are aiming for long term success. The cause behind your debt can be anything from medical expenses to overspending, loss of income or lack of budgeting. Once you figure out the problem where it all began, that’s when you can devise a proper plan to prevent a relapse.
2-Create A Detailed And Realistic Budget
It is said that your budget is your financial blueprint. It can help you keep a track of your expenses, your income and your savings. Even if you’ve never been in debt, you should still start budgeting in order to secure your financial future. In order to make a practical and realistic budget, you just need to track down all of your expenses. From your utility bills to groceries to mortgage, monitor everything where your money goes. The second step is to differentiate your needs from your wants. You should spend only on the necessities of your life. Other things like dining out, entertainment or subscriptions, these are non-essential and you should cut down such expenses as much as you can. Lastly, use the 50/30/20 rule. As per this rule, you should spend 50% of your income on your needs, 30% on your wants and the rest of the 20% should be your savings. You should always have an emergency fund especially if you never want to fall into debt again.
3-Build An Emergency Fund
Emergencies are inevitable and unexpected expenses can arise anytime. For such situations, you should have an emergency fund prepared no matter what. You should use a savings account specially to save your emergency fund and it’s best if you save around 3 to 6 months of essential living expenses. The two best tips that can come in handy here are; even if you start small and save $500 every month, it would be enough for you to avoid using credit cards. Secondly, you should automate your savings by setting up automatic transfer to your savings account. Using such strategies can help you build an emergency fund without any hassle.
4-Try To Avoid Any Sort Of New Debt
Even if you feel really tempted to open up any new credit lines, try to avoid it at all costs. Especially if you don’t consider yourself ready to manage the lines responsibly then it’s best to avoid taking any further loans after you’ve been through a debt settlement. Here are some precautions that can help you;
- Limit the usage of your credit card: You should only use a single low limit credit card and that too a secured one as it will help you rebuild your credit again after debt settlement.
- No co-signing: If you aren’t at that stage where you can take responsibility for someone else’s debt then it’s best if you refuse co-signing.
- Don’t finance any large purchases: Don’t buy anything you don’t really need. From electronics to vacations or items like furniture, you should avoid financing such large purchases especially when your goal is to save as much money as possible.
5- Try To Live Below Your Means
In order to live a debt-free life, you should adopt a frugal lifestyle. When we say “live below your means”, that doesn’t mean deprivation in fact, it’s about making responsible spending decisions where you don’t just waste your money on unnecessary things. For example, instead of eating out a lot, you should prioritize home cooked meals. Try to find second hand items as they are much cheaper than new ones. Cancel any unused subscriptions especially when you don’t need them and lastly, spend as less of your income as you can because the more you save, the better it’ll be for your future.
6-Keep A Track Of Your Finances And Your Credit
In order to stay on track, you must monitor your finances and keep reviewing your credit as well. One of the most important things to do after a debt settlement is to keep checking your credit report every now and then. Secondly, you should review your budget and your expenses every month in order to make sure that you are on the right track. If any month, you find yourself overspending, figure out the cause and ensure that you avoid it in the upcoming months.
7- Financial Counseling Is The Best Solution
To some people financial counseling is nothing but a waste of time and then such people are more prone to ending up in debt especially because their finances are all messed up. You should work with a certified financial counselor to figure out your financial situation and ensure that you never end up in debt ever again. These counselors have just the right professional experience and expertise you need to secure your financial future.
8-You Should Have Financial Goals
Life is nothing without purpose and the same rule applies to your financial life as well. You should take measures to keep yourself focused and motivated and this is where setting and working towards a financial goal can come in handy. It can be anything from saving for a home to building a retirement fund, investing for the future or simply paying off your student loan. No matter what you goal is, once you achieve your little milestones, you should celebrate them in the best way possible because that is what will keep you motivated in life.
Final Verdict
It’s true that debt settlement can give you a second chance to figure out your finances but if you want to stay debt-free, it’s important that you first discipline yourself and follow a long term commitment for your financial health. Even if you are using credit again after a debt settlement, you should use it wisely. For example, you must pay your balance in full every month and keep your credit utilization ratio low. The more responsibly you spend, the more it’ll reflect on your life.
All you need to do is to learn from your past mistakes, adopt smart financial habits and keep an eye on where your money goes every month. This is how you can break free from the cycle of debt without putting much effort. Remember that getting another loan should never be an option for you, it should only be done when it’s your last resort and you can’t even meet your day to day needs.
FAQs
Q1. What Is The Biggest Risk After Settling Debt?
The biggest risk after a debt settlement is returning back to your old habits or falling into those circumstances again that caused the debt in the first place. To avoid such a relapse, it’s best to have an emergency fund prepared. If you start saving up, it’ll help you deal with unexpected emergency situations and you won’t have to take out more loans.
Q2. Will My Credit Score Improve After Debt Settlement?
Debt settlement can take a dig at your credit score but it’s not permanent and you sure can take measures to improve your score. All you have to do is to keep your credit utilization ratio low, pay your bills on time and avoid any further loans. With such measures, you can see an improvement in your credit score within months.
Q3. How Much Should I Have In My Emergency Fund To Avoid Debt?
You should save around 3 to 6 months of essential living expenses. If that sounds too much for you then start low. For example, you can start by saving $500 to $1000 every month and then grow the figure when you can afford it.
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