Let’s face it: consumer debt is one of the biggest obstacles to financial security. Carrying a balance on your credit card is a slippery slope: as finance charges accumulate, you slip deeper and deeper into debt—making it increasingly difficult to get your head above water.
What can you do to avoid this terrible fate? Adopt a Pay-As-You-Go lifestyle. When you cut credit out of your life, you’ll put an end to the vicious cycle of debt. Instead of enriching banks and credit card companies with your monthly interest payments, you’ll be able to focus on building your own wealth.
All it takes is a change in attitude, and shift in spending habits. Just follow these six Pay-As-You-Go Principles to dramatically transform your finances:
1. Save up for what you want. Don’t pay interest for instant gratification! When you buy something on credit, you’re overpaying for the privilege of having it immediately. Whether it’s a new dishwasher or trip to Disney World, make do without it until you have the cash.
2. Pay with cash. Cut up your credit cards, and use only cash—it’s the easiest and most effective way to put the brakes on overspending. It’ll also eliminate those expensive impulse purchases, since you’re unlikely to be carrying enough cash when the urge to splurge strikes.
3. Never carry a balance. If you must use a credit card (for example, to make an online purchase), pay off the balance in full each month. Carrying a balance is the worst blow you can deal to your personal finances—resolve to do everything in your power to avoid it.
4. Don’t finance a car. Make your car fit your budget, not the other way around. Instead of financing a flashy new convertible, save up your cash and settle for a used sedan. Until you have the funds, explore alternative transportation options like biking, public transit, and sharing rides with friends and family.
5. Borrow things instead of money. It’s always better to borrow an item, than borrow the money to buy it! Instead of running to the store the next time you need something (for example, a ladder to clean your gutters), ask friends or family if they have one to lend.
6. Rent seldom-used items. If you can’t find someone to lend you an item, consider renting it. If it’s a seldom-used item—like a camcorder, steam cleaner, or circular saw—it often makes better financial sense to pay for temporary use of it than to buy it.
By nature, the Pay-As-You-Go strategy makes you live within your means—because without credit, you can’t spend any more than the cash you have on hand.
Adopting such a plan will stabilize your finances and keep you out of debt. But if you really want to see results, take it one step further and live below your means. Embrace the challenge of living on less than your paycheck, and invest the remaining money. When you make interest work for you (instead of against you), you’ll be on the road to financial security!
Know your net worth—it’s an essential step towards taking control of your finances.