How to Avoid Debt

How to avoid debt? Avoiding debt begins with a simple maxim: Do not confuse income with wealth – while income is like a moving river, wealth is like a reservoir. If you do not watch your spending, your income will slip away from you very quickly.

Premature affluence is a particular cause for concern. As Jerald Bachman from the University of Michigan suggests, “In the absence of payments for rent, utilities, groceries and the many other necessities routinely provided for by parents, the typical student is likely to find that most or all of his earnings are available for discretionary spending”. This premature affluence is dangerous, because many young people have not factored in the daily necessities that they need to pay for on their own later.

Watch your fixed costs

As Jon Hanson suggests, your “burn rate” will determine your fate! Your burn rate is the money spent that does not increase your wealth in any way; it is spending on liability – all that is consumed and gone forever. As your income rises, resist the temptation to similarly make your lifestyle more extravagant. Always be aware of the difference between what you want and what you actually need – only with either lower expenses or higher incomes can you gradually begin to accumulate wealth.

How did the millionaires acquire their wealth? They gradually earned more money, chose delayed gratification (instead of instant gratification) and therefore controlled their burn rate (fixed costs). As their fixed costs became a smaller and smaller percentage of their income, they became wealthier and wealthier.

Do not fall into the trap of wanting immediate gratification

Many people spend money in order to appear wealthy. They eat at the most expensive restaurants, wear only designer labels and get a new mobile phone every month. Yet, these people could in time be the poorest of the lot as they become crippled by debt.

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