Contrary to what you may think, being debt-free doesn’t involve intense suffering, or depriving yourself of all your dreams and ambitions.

The whole point of being debt-free is to keep your credit score healthy, which in turn provides you access to more financial products and assets to live a better life.

That said, it still takes a certain amount of self-discipline to keep yourself in good financial health. It’s as simple as following the steps listed below:

Observe a 20 percent debt repayment ratio

Let’s say you really want to go on that dream trip and tick that checkbox on your bucket list. But you just need that extra bit of money to make this dream come true. Can you afford to “put it on your tab”? A good way to decide is to use the 20 percent rule.

Excluding your home loan, your total monthly debt repayments should not exceed 20 percent of your income. For example, if you earn S$3,500 per month, you should have no more than $700 in repayments for personal loans.

If taking on a new loan would bust this $700 mark, then sorry – you can’t afford it. Pay your existing loans first, then you can consider going ahead with that vacation.

Credit cards are for paying, personal loans are for borrowing

Noticed how we did not factor the credit card payments in the above mentioned point? That’s because it should always, and we really mean it, ALWAYS be paid off before you consider a personal loan.

Your credit card should be used purely as a mode of payment. If you charge $500 to your credit card, you should repay the full $500 (and not just the minimum).

Credit cards have an interest rate of around 26 percent per annum, which is too high to justify using for loans.

If you need to borrow money, use a personal loan instead. These have a much lower interest rate. For example, the HSBC Personal Loan on has an interest rate of just 4.5 percent per annum. There’s no reason to borrow on your credit card when this option is more manageable to repay.

Keep an emergency fund of six months of your expenses

The first step in personal finance management should be to set aside 30 percent of your monthly income. Do this until you have six months of your expenses, after which you can invest that money.

Having six months of your expenses will tide you over, during an emergency. If you’re suddenly retrenched, or you’re unable to work for medical reasons, it ensures that the home loan stays paid, and you won’t go hungry. Six months buys you time to recover, so you can find a new income stream.

As an aside, an emergency fund reduces your reliance on personal loans. This prevents you from getting in debt during a personal financial crisis.

Restrict access to money when you’re out with spendthrifts

We all have one or two people who – through no deliberate fault of their own – encourage us to spend. We’re talking about the buddy who tells you to “go ahead, treat yourself” to a pair of $350 sneakers. Or that foodie cousin who always wants to go to restaurants that cost $80 per head.

Take some time to identify who these people are. The next time you go out with them, leave your credit card at home; bring only what you can afford to spend. The temptation doesn’t exist if you simply don’t have the money.

Read more: Credit score 101

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7 essential steps to keep your finances in check

Automate your savings

Use bank GIRO to deduct your necessary savings and expenses (try to save around 20 percent of your monthly pay), as soon as it comes in.

Don’t spend first and struggle to leave a certain amount left afterward. Human nature just doesn’t work that way, and you’ll have to fight constant temptation to spend.

Don’t even go through the whole process of thinking how much and when you should transfer your money – let your bank put it safely aside for you.

Constantly look at your savings

We’ll let you in on a secret: saving money is habit forming. Everyone has a certain “tipping point”, after which it’s easier to save than not to save. Once you reach this point, you’ll find it easy to keep your finances in check.

For example, if you check your savings after the second year, and discover you have over $20,000, that might be the tipping point – soon you’ll be driven to add to your “stash”, from the delight at seeing it grow.

At that point, saving money becomes second nature and brings with it a sense of satisfaction.

So do view your savings and investments at the end of each year, to see how far you’ve come. This will make you think twice, the next time you want to make a financially disastrous decision (like a buying a car that would wipe out all that effort).

Seek help as soon as possible, if your debt is piling up

If your debt is becoming unmanageable, then seek help as soon as possible. Approach credit counselling services, and consider enrolling in debt management programmes.

Remember that, due to the power of compounding interest, debts will snowball to significant proportions when ignored. At an interest rate of around 26 percent per annum, a credit card debt can almost double in the span of just three years.

The quicker you address the situation, the smaller the debt you’ll have to tackle (and the less pain you’ll experience).