Some people wind up in debt as a result of unfortunate circumstances. After all, a poorly-timed layoff or an unexpected medical issue can cause an otherwise financially responsible person to find himself in a world of debt. On the other hand, plenty of people end up in debt and have no one to blame for that fact but themselves. Improper economic planning, careless spending, and credit card abuse are all factors that can contribute to classic consumer debt, and despite the age old warnings to avoid the curse of the high interest rate, people just don’t seem to be catching on.
As a bankruptcy attorney who has spent the past three years helping clients manage and settle their debts, Darren Hojnacki of the firm Hojnacki & Hojnacki, LLC thinks that it’s important for people to do what it takes to avoid debt. He therefore offers the following quick guide to keeping monthly spending habits in check:
Housing
Given the recent mortgage industry crisis, many experts are now taking a more conservative approach to home-related spending. Though not a financial professional himself, Hojnacki’s opinion on the matter is that no more than 25% to 30% of your net income should be spent on housing. This figure includes not only a mortgage payment, but the amounts needed for real estate taxes and homeowners insurance.
Transportation
While commuting costs such as gas and tolls can’t always be helped, one thing that you can control is the amount of money you spend on a car payment each month. According to Hojnacki, unless you’re really making the big bucks, there is little reason to end up spending more than $300 a month on a car payment. Additionally, you should try to make sure that your transportation costs do not exceed more than 10% of your monthly income.
Food
There’s no question about it: People need food in order to live. However, just because you need food doesn’t mean that you have to spend more than is necessary on it. In fact, you should make certain not to spend more than 10% of your net income on grocery and dining costs. You might have to cut back on restaurant visits and lunches out, but if you’re looking to avoid debt, then being frugal with food is one of the best ways to do so.
Utilities
Utilities are an expense that you mostly can’t skimp on, but that doesn’t mean that you shouldn’t do your best to keep those energy, cable, and phone bills to a minimum. In fact, you shouldn’t have to dedicate more than 10% to 15% of your monthly income to the payment of utility bills. If you find that you’re spending more than that, then it might be time to scale back that cable channel lineup or forego that unlimited calling plan.
Leisure and entertainment
If you work hard during the week, then it’s natural to want to cut loose when the weekend arrives. However, under no circumstances should you spend more than 10% of your net income on leisure and entertainment alone. Considering all the other expenses that are bound to come your way — including home repairs, medical bills, and general obligations — it’s important that you not drink and dance your way into debt.
Of course, the above-listed tips can only be used as a basic guide to healthy spending. You’ll also need to take into account other factors when mapping out your monthly budget, such as student loan payments, retirement plan contributions, and general savings goals. If you have your heart set on taking your dream vacation at the end of the year, then you’d be wise to cut your entertainment spending in half. And if you’re planning on getting married in the near future, then you might want to limit your housing costs in order to stock up enough cash to pay for that wedding.
When it comes to avoiding debt, the key is to approach your financial situation realistically. If you happen to own your vehicle and therefore don’t need to make a monthly car payment, then you might be able to upgrade to a better cable TV package. On the other hand, if you have a fair amount of student debt that needs to be paid off, then you’d be wise to take on a lower mortgage to ensure that you don’t run into any cash flow problems. At the end of the day, all of the financial rules of thumb in the world won’t do you any good if you don’t apply them towards your personal situation in a practical fashion. By taking stock of your circumstances and spending cautiously, you can do your part to avoid debt and live a financially healthy lifestyle.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Publication of this article and your receipt of this article does not create an attorney-client relationship.
