One of the first things you should do to become debt free is establish a pattern of saving. There are 3 specific areas to consider. These 3 areas are Emergency Fund, Saving for Large Purchases and finally Investments such as a Roth IRA, Traditional IRA or 401K plan.
1. Emergency Savings: This is a quick $1000.00 to put a gap between you and life. Face it life happens, you get a flat tire, the water pump or alternator goes out in the car. Having an emergency fund will keep you from using a credit card or borrowing the money in the form of a loan. You can save a $1000.00 quickly if you are motivated, sell something or EBay or a garage sale. I bet you have items around the house that you don’t use. Once you are out of debt then you would fully build this fund to 3-6 month’s worth of your expenses.
2. Big purchases: Those items that cost more than a few hundred dollars, like a flat screen TV, new dishwasher or washer and dryer. These items are usually items you know will need to be replaced at some point so why not start a special savings account for them? You could divide the cost of said item, them save a portion each month until you have the cash to purchase the item. This would keep you from using credit and going into debt.
3. Investments: Investing is a much broader savings approach. It’s for your future and should be something 10, 20, 30 or 40 years away to allow your money to work for you in addition to compound interest (Compound interest (or compounding interest) is interest calculated on the initial principal and on the accumulated interest of previous periods of an investment). It an exponential experience, your money grows at a rapid rate compared to simple interest.
Your income is your largest wealth building tool. Get your savings on track to avoid future debt and build wealth for your future.