How to Avoid Debt at a Young Age | 10 Key Lessons

Are you in your teens or twenties and looking for smart ways to avoid debt at a young age? If so, it doesn’t have to feel overwhelming.

Whether you’re looking to avoid student loans, credit cards or other long-term forms of debt, we’ve got you covered! Here are 10 key lessons that will help you beat the odds and make wise financial decisions now and into the future.

1. Create a Realistic Budget

Creating a realistic budget is an essential part of your financial well-being.

By making a list of expenses and income, you can stay on track and avoid debt at a young age.

Budgeting also allows you to allocate your money to things that really matter, like saving for a house or retirement, and taking care of necessary expenses like rent, utilities, and groceries.

Check out this link to learn about even more key reasons why budgeting is so important.

If you are ready to start a budget to take control of your financial future, here are the most common and effective ways to kick things off:

• Pen and paper: This is the most basic tool for creating a budget. Simply write down your income, expenses, and savings goals on a piece of paper.

• Spreadsheet software: Programs like Excel or Google Sheets allow you to create detailed budgets with formulas that automatically calculate totals and track changes over time.

• Mobile apps: Budgeting apps like Rocket Money connect to your bank and allow you to automate your budget on the go and easily record expenses.

With a little effort and patience, you can create a budget that works for you and sets you up for financial success in the future.

2. Distinguish Between Wants and Needs

One of the most important financial lessons that young people can learn is the difference between wants and needs.

While it may seem tempting to have the latest gadgets, designer clothes, or trendy accessories, it’s crucial to understand that these items are not necessities.

Instead, our needs are things like food, shelter, and clothing necessary to survive.

Check out how easy it is to let thousands of dollars slip through the cracks:

• According to a survey by the Bureau of Labor Statistics, the average household spends approximately $3,203 on entertainment, including TV and internet services, games, movies or events.

• According to an article by CNBC, the average American spends about $1,497 a year on nonessential items such as dining out and subscription services.

• The same article also states that the average person spends about $1,288 a year on unnecessary expenses like coffee, snacks, and impulse purchases.

By recognizing this distinction, you can avoid falling into debt at a young age, and start building a secure financial future.

It’s important to be mindful of our spending habits, so we can prioritize our needs while still enjoying some wants in moderation.

3. Cut Unnecessary Expenses

As we navigate our daily lives, it’s easy to accumulate expenses that seem small at the time but can add up quickly.

It’s important to cut unnecessary expenses not just to save money, but also to avoid debt at a young age.

Here are a few examples of the potential savings by cutting unnecessary expenses:

• Coffee: If you buy a $5 cup of coffee every weekday, that’s about $1,300 a year. By making your own coffee at home or at work, you could save hundreds of dollars.

• Eating Out: If you were to eat out twice a week and spend an average of $20 per meal. That’s about $2,080 a year. By preparing meals at home and packing lunches, you could save thousands of dollars.

• Subscription Services: Let’s say you have three subscriptions that cost $10 each month. That’s about $360 a year. By cutting back on unnecessary subscriptions, you could save hundreds of dollars.

For more tips on how to save money and cut expenses, check out this article from The Balance.

By making small changes like bringing your lunch to work or canceling unused subscriptions, you could end up saving hundreds or even thousands of dollars in the long run.

4. Build an Emergency Fund

Life is unpredictable, and emergencies can happen at any time.

This is why it’s essential to build an emergency fund, especially when you’re young.

Emergencies can range from medical bills to unexpected car repairs, and if you don’t have the money saved, you may have to rely on credit cards or loans to pay for them.

This can lead to debt and financial struggles down the road.

Here are some common financial emergencies and their average costs:

• Medical Emergencies: According to a study by NerdWallet, the average cost of a medical emergency is $2,000.

• Car Repairs: The average cost for major car repairs can range from $500-$1,000.

• Home Repairs: Depending on the issue, home repairs can cost anywhere from a few hundred dollars to several thousand dollars.

• Job Loss: The financial impact of job loss varies greatly depending on individual circumstances, but experts recommend having at least 3 months worth of living expenses saved in case of unemployment.

Building an emergency fund may seem daunting, but it’s a lot easier than you think.

Start by setting aside a small amount each month, and before you know it, you’ll have a cushion to fall back on when those unexpected situations arise.

5. Explore Affordable Housing Options

As a young adult, avoiding debt is crucial when it comes to building a solid financial foundation for the future.

One of the largest expenses for many people is housing, but there are affordable options available.

Exploring these options can not only help you save money, but also potentially avoid taking on unnecessary debt.

Here are a few options you could look into:

• Shared Housing: This can significantly reduce your rent and utility expenses. For example, if the average cost for a one-bedroom apartment in your area is $1,500 per month, finding roommates and splitting the cost could save you $750 per month or $9,000 per year.

• Renting a Room: Renting a room in someone’s home can be an affordable option. The average cost for a rented room is around $700 per month, which could save you over $800 per month or up to $10,000 per year compared to renting a full apartment.

• Co-Living Spaces: This is a newer trend where individuals rent private rooms in a shared living space, often with communal areas like kitchens and living rooms. These spaces can be more affordable than renting an entire apartment, with costs ranging from $500-1,000 per month depending on the location.

Whether it’s renting a smaller apartment or finding a roommate, taking the time to research and compare your options can make a major impact on your budget.

6. Cook at Home

Cooking at home is not only a great way to save money but also a wise decision to avoid debt at a young age.

By reducing your dining-out habits and investing in groceries, you can save hundreds, if not thousands of dollars each year.

• According to a survey by the Bureau of Labor Statistics, in 2019, Americans spent an average of $3,526 on food away from home. This includes eating out at restaurants and purchasing prepared meals or snacks.

• The same survey reported that individuals spent an average of $4,464 on groceries for the year. By cooking at home more often, individuals could potentially save over $900 per year.

Not only does this reduce expenses and help avoid debt, but it also allows for healthier eating habits and the potential to learn valuable cooking skills.

Overall, making small changes in our daily habits can have a significant impact on our finances in the long run.

7. Use Public Transportation

As a young adult, it’s not uncommon to get caught up in the freedom and excitement of having your own car, but relying on public transportation can actually have a lot of benefits, especially when it comes to your finances.

By avoiding the costs of car payments, insurance, gas, and maintenance, you have the potential to save a lot of money and avoid debt at a young age.

Plus, taking public transportation can be a more eco-friendly option and allow you to use your commute time for reading, working, or just relaxing.

It’s alarming how much money you can save by avoiding car ownership, check this out:

• According to Edmunds, the average car payment for a new vehicle in 2020 was $568 per month. This adds up to over $6,800 per year.

• The American Public Transportation Association reported that the average cost of an unlimited monthly public transportation pass is $70. By using public transportation, you could potentially save over $6,000 per year.

• Maintaining a car can also be costly. AAA estimates that the average cost of car maintenance and repairs is around $9,000 per year.

Overall, choosing to use public transportation can add up to significant savings over time, allowing for a stronger financial foundation and less reliance on debt.

8. Avoid Lifestyle Inflation

When you finally land a great job, it’s natural to want to indulge a little.

But beware – lifestyle inflation is lurking around every corner. The temptation to spend more money once you begin making more money can be overwhelming.

However, succumbing to these desires can quickly lead to debt, especially at a young age.

Here is a list of some of the most common suspects of lifestyle creep:

• Purchasing a new car with a higher monthly payment and insurance costs.

• Moving to a larger, more expensive apartment or buying a house with higher mortgage payments.

• Splurging on luxury items like designer clothing, jewelry, or electronics.

• Dining out at fancy restaurants more frequently.

• Taking extravagant vacations or traveling first class.

While treating yourself every once in a while is completely fine, it’s important to be mindful of your spending habits and avoid making significant changes that will increase your expenses.

Instead, also consider saving or investing a portion of your extra income for the future.

9. Delay Major Purchases

In today’s instant gratification culture, it’s easy to get caught up in the excitement of making major purchases at a young age.

However, taking a step back to consider the long-term consequences of such decisions can prevent falling into overwhelming debt.

It’s wise to delay major purchases like a car or house until you’re able to save a significant amount of money.

• According to a study by the Urban Institute, homeowners who purchase before they’re financially ready and rely on loans with smaller down payments often face higher interest rates and PMI (private mortgage insurance). This can add thousands of dollars to the overall cost of a mortgage.

• A report by Experian found that the average car loan term is now over 69 months, with an average interest rate of 5.11%. This means that individuals are paying more over time and could potentially end up owing more than the car is worth.

By avoiding these kinds of debts at a young age, you’ll have financial freedom and flexibility in the future.

So take a deep breath and practice patience – delaying those big purchases now will pay off in the long run.

10. Seek Financial Education

When it comes to managing your finances, knowledge is power.

That’s why it’s important to seek financial education, especially at a young age.

By learning the basics of budgeting, investing, and saving, you can avoid falling into debt traps and set yourself up for a more secure financial future.

Here’s a few options that provide free information around financial education:

• Online Resources: There are plenty of websites and blogs that offer free information on budgeting, saving, investing, and more. Some popular ones include Investopedia and The Balance.

• Books: Check out books about personal finance from your local library. Some popular titles include “I Will Teach You to Be Rich” by Ramit Sethi and “The Total Money Makeover” by Dave Ramsey.

• Podcasts: There are also many podcasts dedicated to personal finance, such as The Dave Ramsey Show or So Money with Farnoosh Torabi.

• Local Workshops or Seminars: Keep an eye out for free financial education workshops or seminars in your area. These may be offered by banks, community centers, or non-profit organizations.

• Government Resources: The Consumer Financial Protection Bureau offers free resources and tools to help individuals make informed financial decisions.

Taking the time to educate yourself on the ins and outs of money management will pay off in the long run, both financially and mentally.

So don’t hesitate to seek out resources such as financial advisors, online courses, or personal finance books – investing in your financial knowledge now will pay dividends for years to come.

Conclusion

Managing your finances at a young age is crucial in setting yourself up for a secure and stable future.

By following these tips delaying major purchases, and seeking financial education, you can avoid falling into debt early on in life.

Taking control of your finances now will not only benefit you financially but also give you peace of mind and the freedom to make choices that align with your values and goals.

So start implementing these strategies today and watch your financial foundation grow stronger over time.

Remember, it’s never too early to start building a solid financial future for yourself. So take charge of your finances now and reap the rewards in the years to come.

To learn other ways to avoid debt at a young age, check out our resource center!

FAQ

Q: How can I avoid debt at a young age?

A: One way to avoid debt is by being mindful of your spending habits and avoiding significant changes that will increase your expenses, also known as lifestyle inflation.

Q: Can I ever treat myself or make major purchases at a young age?

A: Absolutely! It’s important to enjoy life and reward yourself for your hard work. However, it’s crucial to be mindful of your spending habits and avoid making significant changes that will increase your expenses.

Q: What is lifestyle inflation?

A: Lifestyle inflation, also known as lifestyle creep, is when an individual increases their spending habits as their income increases. This can lead to overspending and falling into debt.

Q: Is it necessary to delay major purchases until I have a significant amount of money saved?

A: It’s not always necessary but can be beneficial in the long run. By saving up for major purchases, you can avoid taking on debt or paying more interest over time.

Q: How can I learn more about managing my finances?

A: There are many resources available, such as online articles, books, podcasts, and workshops. It’s important to actively seek out financial education to better understand budgeting, saving, and investing.