According to CBC, the average American has over $90,000 in debt. Accumulating debt is not only a financial burden – it can be mentally and emotionally taxing as a borrower finds themselves trapped in debt because the high-interest charges keep piling on. Read on for some of my simple tips to avoid a debt trap. If you need additional guidance with your retirement planning journey, contact us at info@sextonadvisorygroup.com.
an emergency fund is essential
Aside from budgeting and living within your means, having an emergency fund for unexpected expenses is one of the best ways to avoid going into debt in the first place. Plan to have at least 6 months’ worth of expenses saved in this fund, which can help you financially weather a temporary crisis and keep things running until
the situation stabilizes.
consolidate various loans under a single one
Taking on multiple loans at different interest rates beyond one’s capacity to repay can be resolved by taking on a single loan. By doing so, the borrower can simplify their finances and no longer need to worry about remembering multiple repayment dates. This step can help the borrower better emerge from a debt trap.
leverage cash flow to prepay high-cost debt
An important factor to streamline your repayments and avoid debt traps is to use a temporary inflow of funds to prepay debt with high-interest rates. These include annual bonuses or capital gains on share sales which can be used to prepay personal, credit card, or auto loans. When loans with high-interest rates are repaid, you are effectively saving the extra amount that would otherwise have gone towards the higher interest charges.