We live and learn and some of us have to learn our lessons about debt through personal experience.  The one major benefit of this is that we can pass on what we’ve learned to other people so that hopefully they can live their lives without ever being ensnared in problem debt.  With that in mind, here’s what I’d tell my younger self about debt.

It’s easier to avoid debt than to get out of it

This may sound like stating the extremely obvious, but as is often the case in life, this can be more complicated than it sounds.  The only way to avoid debt is to make sure that you always have the funds available to meet any necessary expenses.  The problem is that you’re not necessarily going to know what these necessary expenses are going to be.  This is why one of the fundamentals of good budgeting is making sure that you set aside money to create an emergency fund to be used for genuinely unexpected expenses.

The better you manage your budget, the less likely you are to get into debt

Similar comments apply here.  The key to budgeting is to plan not just for your immediate needs but for your future needs.  In particular, you need to be clear about when important items are going to come to the end of their useful life and when service contracts/licences are going to expire (and possibly need to be repurchased).  This will allow you to create sinking funds to replace them and so keep your emergency funds for real emergencies.

You also need to think about what items, services, pets and/or people play a vital role in your life and take out insurance to protect against anything going wrong with them.  Then you need to create a sinking fund to ensure that you have the necessary excess if you need it.  Having the right insurance cover isn’t “throwing money away”.  If you’re a low risk, you’ll get a low premium.  It’s making sure that you’re covered against the sort of bad luck which really can hit anyone at any time.

You need to be careful about signing up to long-term contracts

Signing up to a long-term contract can actually make a whole lot of sense if you are 100% sure that you are going to need the service, as offered, for the entire duration of the contract.  There are, however, two big problems with long-term contracts.  The first is that it can be very hard to be confident that you will actually need a service over the long term and even if you do you may not need it in the exact same form as specified by your existing contract.  The second is that many contracts relate to wants rather than needs or blur the line between the two.

Mobile phone contracts are a good example of how the genuine need of a phone can lead to you being lured into an overpriced, long-term contract.  It’s usually far better value to buy a phone and go for a SIM-only deal.  Even if it isn’t, you may appreciate the reassurance of knowing that you can cancel at any time instead of being locked into a contract.

Some debt is a necessary hazard

This may seem like a really odd point to make at the end of an article about debt.  It is, however, a reality.  The reason for this is that you need to take on debt to establish a credit record and you need a credit record for all kinds of reasons from getting accepted for contracts to being able to rent a home or be accepted for certain jobs.  One way to make this happen is to get a credit card, use it for necessary purchases and pay it off in full each month.

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