There are a few moments that everyone remembers in their life. Their wedding day, graduations, and the birth of their children. For me, there’s another day that I’ll always remember, and that’s the day I became debt free.
Paying off debt once and for all is a monumental achievement. Many Canadians go their entire lives without ever being able to call themselves debt free, and if you get to this point in your life, you should do every you can to stay there.
Unfortunately staying debt free is easier said than done. The pressures of life will constantly pull you back into the clutches of debt, and you’ll have to fight to stay debt free. Fortunately, there are steps you can take that will insulate you from debt and help you avoid taking on debt in the future. Here’s my tried and true method of staying debt free:
Build Up an Emergency Fund
The very first step you should take after becoming debt free is to build up an emergency fund. An emergency fund is an amount of cash saved in a savings account that you’ll use when unexpected emergencies come up like car repairs or even job loss. Typically, the general rule of thumb is to save between three and six months of your basic living expenses. That might seem like a large amount, but that much money will enable you to deal with multiple emergencies without exhausting the balance of the account.
If you’d been paying a lot of money towards your debt every month, you should start building up your emergency fund using that money. Every month, contribute to your emergency fund, and it’ll be full in no time.
Once your emergency fund is full, you won’t have to rely on your credit cards to handle emergencies, which will keep you out of short-term debt.
Learn to Save for Big Purchases
While having an emergency fund will keep you out of debt when an unplanned emergency comes up, many Canadians get into debt because they can’t save up for big purchases like vacations or new cars. Instead, these big, multi-thousand-dollar purchases go on credit cards or lines of credit and sit there, costing interest for years.
That’s where the skill of saving for big purchases comes in. By saving for these purchases in advance you’ll still enjoy vacations, home renovations, and vehicles, but without debt. It’ll take some practice, but you’ll have plenty of experience if you’d already saved up an emergency fund.
The key to saving for big purchases is planning. If you know that your sister is having a destination wedding in six months, the time to start planning and saving for that now. If your car is getting older and you’re starting to think of replacing it, the time to start saving for that is now!
Live Within Your Means
Last but not least, you’ll never be able to maintain your debt-free status unless you adjust your lifestyle and spending to match your income. If you’ve already paid off your debt and saved for emergencies, you know how to restrict your spending. It’s important to continue to live within your means as you move forward because it will keep debt from creeping back into your life.
Living within your means is easier said than done. If you relax your vigilance for even a year and let your spending creep up, you could find yourself back in debt. To avoid inadvertent spending, set a budget and stick to it.