For the last several decades the rates of Americans become more in debt have increased dramatically. With the creation of plastic money (credit cards) the debt ratio continue to climb higher year on year. The pandemic also accelerated a lot of consumers who continue to spend on credit to seek relief from the unfortunate worldwide event.

I remembered one proverb that my mom told me when I was in my teens. I’m not sure if this is a Chinese proverb but it definitely applies to getting into debt and how to get rid of debt. It goes like this: “It takes 3 days to learn bad behavior but it takes 3 years to learn how not to be bad.” Debt is very similar – it takes a very short while to spend money and get into debt, but it takes years to pay it off.

No one likes to get into debt but there are certain circumstances that force us to assume the debt. As an example, no one has the upfront money to buy a car or a house. Naturally we take out a loan or a mortgage so we can afford the shiny new car or the big house. Some of these debts are perfect rationale, but there are others that you should always avoid.

I’m going to list several ways on how to avoid getting into too deep of the debt. However, I’m not going to provide you the magic bullet on how to get out of debt as this is a different subject altogether.

Check Your Credit Annually

At a minimum you should check your credit score annually. Credit score (or FICO score) is what creditors such as banks use to make sure you are a reliable and trustworthy borrower. Additionally, the credit score also measure if you have the means to pay off any debt by checking if you have any revolving credit – the more revolving credit you have the riskier you are. Checking the score is important because it could put you in the “risky” bracket which makes borrowing money from banks or lenders more expensive. The costs of borrowing that money could be thousands to tens of thousands depends on the amount that you need to borrow. As an example, when I bought my first car I did not check my credit score. Unbeknownst to me my credit score was terrible because of a store credit that I opened hand the wrong address. Because of the non-payment of $200 that I put on credit, I was put in the “bad credit” group and received a high interest rate. A $200 dollar purchase ended costing me almost $7,000 in extra interest that I have to pay.

Pay Off Balance

Always pay off any balance on the credit cards. Believe it or not credit cards carry the highest interest rate of any borrowing. If you have a balance on your credit cards, never pay the minimum. The interest from the credit card will continue to compound and the ending balance will continue to go up. Paying off the credit cards not only help your credit score, it also builds good habit of controlling your spending, which brings up the third point.

Buy Only What You Can Afford

We should only be buying things that we can afford. Never buy anything that is beyond your means. For example, if you work in retail store and make only less than $30,000 a year it would be a bad idea to purchase a car. Not only a car will need to be paid monthly, you have also need to consider the cost of the insurance and regular maintenance of the car. The total cost will exceed what you could afford based on your annual income. A good example is my neighbor who bought a Mercedes SMG seven years ago. The price of the car was $150,000. My neighborhood is the regular suburb and no one was a millionaire. His Mercedes started to have problems and was always in a shop. He sold the car 5 years later. And two years ago he was found guilty of failing to file $600,000 in income. He drives an 8 year old used sedan today.

Save First Spend Later

I can’t stress this enough. The money you earn every month is not free money and it is not bottomless. Once it is used up, it is gone forever. To ensure you do not get into debt, I highly recommend that you “pay yourself” by saving it in a high yield savings account or investing it in reputable stocks that pay dividend. Once you have those money saved, they are out of sight and out of mind, which creates a mindset that you no longer have those disposable income available to spend and thus creating less debt.

Don’t Treat Yourself

This is very different from “paying yourself”. I’m referring to spending unnecessary because you feel you deserve it. I’ve heard and read of how one spends lavishly on a vacation or buys a brand name handbag because he believes he earns it after working hard for the past year. I’ve even heard this from my younger sister when she said she wants to treat herself well. Well enough that she got herself into $40,000 in debt. It took her almost 10 years to pay off the debt. In the same 10 years if she invested the same $40,000 in Apple stock 20 years ago, she would be a millionaire today.

Debt is a good thing if it is being handled correctly. For example, without carrying a debt you won’t be able to build your credit score to demonstrate that you are trustworthy among the creditors eyes. However, if you start building too much debt that you can’t afford to pay off the consequences could be harsh. Not only you will not longer able to borrow the money that you desperately need you could lose everything that you own today.