How to avoid getting back into debt?

Question

I got a windfall last year that allowed me to clear all my debt. I am a student, so my incomes are small. After the debt was cleared there was still some money left, which I gradually used for paying monthly bills, buying food etc. The thing is that my incomes are too small compared to expenses, and I will be soon in debt again. I would really like to avoid that. So, I am here to look for advice.

So, at the moment, I don't have any debts or loans. I don't pay for a cable. Luckily, I can use the internet for free. I get the cheapest electricity, and my phone bills are small. I don't own a car. The only thing that would seem to help is to get a job but it would slow down my studies..

Answer 1

Draw up a budget and see where most of you expenses go to. See if you can cut any not essential expenses.

If this doesn't help much you will need to increase your income. Ways to do this without going into debt may be to get a job, ask your parents for money, sell some of your non essential things, tutor fellow students or students in earlier years, just to name a few.

Basically, if you want to stay out of debt you income needs to be higher than your expenses. So you either need to reduce your expenses, increase your income, or both. Without further information from yourself it would be quite hard to direct you in the right direction.

Answer 2

First, you've learned a very good lesson that quite a few people miss out on: notice how easy it is to get out of debt when you get a windfall of money? The trouble is that if a person doesn't have the behavior to maintain their position, they will end up in the same place. Many lottery winners end up being poor in the long run because their behavior is the problem, not their finances.

If you feel that you're going to end up in debt again, this means simply that somewhere in your finances, your expenses exceed your income. Simply put, there's only two fundamental things that can be done:

1. Decrease your expenses.
2. Increase your income.

You can do one or the other, or both. Over budgeting, I prefer automation - automate your bills and spending by setting up a bill and spending account and when the money's gone, it's gone (you can tell yourself at that point, "I have to find another source of income before I spend more"). This not only helps you show where your money is going now, it also puts a constraint on your spending, which sounds like most of the problem currently. Many of my friends and I make our saved/invested money VERY HARD to access, so that we can't get it immediately (like putting it in an account that will require three or four days to get to).

The purpose of this is to shape your behavior into actions of either increasing your income, decreasing your spending, or both.

Answer 3

Congratulations on seeing your situation clearly! That's half the battle. To prevent yourself from going back into debt, you should get rid of any credit cards you have and close the accounts. Just use your debit card. Your post indicates you're not the type to splurge and get stuff just because you want it, so saving for a larger purchase and paying cash for it is probably something you're willing to do. Contrary to popular belief, you can live just fine without a credit card and without a credit score. If you're never going back into debt, you don't need a credit score. Buying a house is possible without one, but is admittedly more work for you and for the underwriters because they can't just ask the FICO god to bless you -- they have to actually see your finances, and you have to actually have some. (I realize many folks will hate this advice, but I am actually living it, and life is pretty good.)

If you're in school, look at how much you spend on food while on campus. $5-$10/day for lunch adds up to $100-$200 over a month (M-F, four weeks). Buy groceries and pack a lunch if you can.

If your expenses cannot be reduced anymore, you're going to have to get a job. There is nothing wrong with slowing down your studies and working a job to get your income up above your expenses. It stinks being a poor student, but it stinks even more to be a poor student with a mountain of debt. You'll find that working a job doesn't slow you down all that much. Tons of students work their way through school and graduate in plenty of time to get a good job.

Good luck to you! You can do it.

Answer 4

Depending on how marketable your degree is, in the long run you may be better aquiring some student debt rather than slowing down your studies. For example finishing finance, medicine, or engineering a year later would mean one less year of your life that you are earning substantial income. The only situation where slowing down your studies is of benefit is if your savings plus interest would be greater than the income you are giving up by taking longer.

Live frugally, take whatever work you can without hurting your studies, don't stress if you can't get this to balance perfectly.

I speak from experience on this. Screwing around with working through school cost me 2.5 years of earning potential ($120,000+).

Answer 5

Spend less than you earn. If you have no job (source of income), then you can not possibly stay out of debt as you have to spend money to live and study.

Answer 6

The essential (and obvious) thing to avoid getting back into debt (or to reduce debt if you have it) is to make your total income exceed your total expenses.

That means either increasing your income or reducing your total expenses. Either take effort. Basically, you need a plan.

If your plan is to increase income, work out how. If the plan is to increase hours in your current, you need to allow for your needs (sleep, rest, etc) and also convince your employer they will benefit by paying you to work more hours. If your intent is to increase your hourly rate, you need to convince a current or prospective employer that you have the capacity, skills, etc to deliver more on the job, so you are worth paying more. If your intent is to get qualifications so you can get a better paying job, work out how much effort (studying, etc) you will apply, over how long, what expenses you will carry (fees, textbooks, etc), and how long you will carry them for (will you accept working some years in a higher paying job, to clear the debt?).

Most of those options involve a lot of work, take time, and often mean carrying debt until you are in a position to pay it off. There is nothing wrong with getting a job while studying, but you have to be realistic about the demands. There is nothing sacrosanct about studying that means you shouldn't have a job. However, you need to be clear how many hours you can work in a job before your studies will suffer unnecessarily, and possibly accept the need to study part time so you can work (which means the study will take longer, but you won't struggle as much financially).

If your plan is to reduce expenses, you need a budget. Itemize all of your spend. Don't hide anything from that list, no matter how small. Work out which of the things you need (paying off debt is one), which you can get rid of, which you need to reduce - and by how much. Be brutal with reducing or eliminating the non-essentials no matter how much you would prefer otherwise. Keep going until you have a budget in which your expenses are less than your income. Then stick to it - there is no other answer. Revisit your budget regularly, so you can handle things you haven't previously planned for (say, rent increase, increase fees for something you need, etc). If your income increases (or you have a windfall), don't simply drop the budget - the best way to get in trouble is to neglect the budget, and get into a pattern of spending more than you have. Instead, incorporate the changes into your budget - and plan how you will use the extra income. There is nothing wrong with increasing your spend on non-essentials, but the purpose of the budget is to keep control of how you do that, by keeping track of what you can afford.

Answer 7

Get someone in your family to pay for it. If that's not an option, you have no choice but to make do with what you can do, and either get a job or a loan. I'd advise a job unless you're studying something with a really strong possibility of getting you a high paid job.

Answer 8

I'm going to subtly and cheekily change the obvious advice. There are three ways to deal with negative cashflow, not two:

1. Decrease your expenditure
2. Increase your income
3. Change your accounting system

You're currently studying for a degree. You don't say what country you're in or how your studies are funded, but most people in the US, UK, and a fair number of other countries, run up debts while studying for a degree. They do this because a degree is valuable to them. They can't avoid it because the tuition alone costs more than most students can generate in income, never mind their living expenses.

So by all means look for savings, (1). Clearly strangers on the internet can't just think up ways for you to spend less money without knowing anything about what you do spend money on. But you can at least list your expenditures for yourself, and see what's necessary. Consider also how much fun you want your studies to be: 4 years in a cold house to avoid paying for heating, and never going out with friends to avoid spending on unnecessary stuff is all very well. But with hindsight you'll regret torturing yourself if you're ever well-off enough to pay back whatever you would have borrowed to use for heating and fun.

Only do (2) if it doesn't affect your studies or if the money you're paid justifies delaying the valuable asset you seek to acquire (a degree, leading perhaps to a better job but at least to the capacity to do a full-time job rather than fitting work around your studies). There are some jobs that are really good fits for students (reasonably low hours that don't clash with classes) and some jobs that are terrible.

If these fail, resort to (3). I don't mean dishonest book-keeping, I mean accept that you are going to borrow money in order to pay for something of value that you can account as an asset. Work out now what you'll need to borrow and how you think you can pay it back, make sure the sum is worth it, budget for that, stick to your budget. You'll still have negative cashflow, nothing changes there, but your capital account looks fine.

Personally I wouldn't actually put a monetary value on the degree, I'm not that bothered about the accounts and it's really difficult to be accurate about it. You can just consider it, "more than I expect to borrow" and be done with it.

Studying costs money. Once you've graduated, you probably aren't going to be back here saying, "I want to buy a house but I have no capital and I don't want to go into debt". Are you? ;-)

Although if you are, the answer happens to be "Islamic mortgage"! I don't know whether Islamic banks have an equivalent answer for student debt, since they can't own a share of your degree like they can a share of your home. Unless you're a Muslim, presumably the ways that Islamic finance avoids interest payments would not in any case satisfy your desire to be "not in debt".

Answer 9

With your windfall, you've been given a second chance. You've become debt free again, and get to start over. Here is what I would recommend from this point on:

1. Decide that you want to remain debt free. It sounds like you've already done this, since you are asking this question.

2. Commit to never borrowing money again. It sounds overly simplistic, but if you stop using your credit cards to spend money you don't have and you don't take out any loans, you won't be in debt.

3. Learn to budget. Here is what is going to make being debt free possible. At the beginning of each month, you are going to write down your income for the month. Then write down your expenses for the month. Make sure you include everything. You'll have fixed monthly expenses, like rent, and variable monthly expenses, like electricity and phone. You'll also have ongoing expenses, like food, transportation, and entertainment. You'll have some expenses, like tuition, which doesn't come up every month, but is predictable and needs to be paid. (For these, you'll can set aside part of the money for the expense each month, and when the bill comes, you'll have the funds to pay it ready to go.) Using budgeting software, such as YNAB (which I recommend) will make this whole process much easier. You are allowed to change your plan if you need to at any time, but do not allow yourself to spend any money that is not in the plan.

4. Take action to address any issues that become apparent from your budget. As you do your budget, you will probably struggle, at first. You will find that you don't have enough income to cover your expenses. Fortunately, you are now armed with data to be able to tackle this problem. There are two causes: either your expenses are too high, or your income is too low.

5. Cut your expenses, if necessary. Before you had a written budget, it was hard to know where your money went each month. Now that you have a budget, it might be apparent that you are spending too much on food, or that you are spending too much on entertainment, or even that a roommate is stealing money. Do what you need to do to cut back the expenses that need cutting.

6. Increase your income, if necessary. You might find from your budget that your expenses aren't out of line. You live in as cheap a place as possible, you eat inexpensively, you don't go out to eat, etc. In this case, the problem isn't your spending, it is your income. In order to stay out of debt, you'll need to increase your income (get a job). I know that you said that this will slow your studies, but because you are now budgeting, you have an advantage you didn't have before: you now know how short you are each month. You can take a part time job that will earn you just enough income to remain debt free while maximizing your study time.

7. Build up a small emergency fund. Emergencies that you didn't plan for in your budget happen. To remain debt free, you should have some money set aside to cover something like this, so you don't have to borrow when it comes up. The general rule of thumb is 3 to 6 months of expenses, but as a college kid with low expenses and no family to take care of, you won't need a huge fund. $500 to $1000 extra in the bank to cover an unexpected emergency expense could be all it takes to keep you debt free.