Paying off debt is a huge financial challenge. While getting into debt is quite easy, many people struggle with getting out of it. After all, living a debt-free life involves much more than paying off credit cards. To improve your financial standing long-term, you have to change your spending habits completely. The decision to clear your debts is a life changer, but only if you’re willing to put the work in. Far too often, people refuse to make this commitment and find themselves in even deeper money trouble. With that in mind, here are sixteen mistakes to avoid when clearing debt.
Starting Without A Plan
Deciding to improve your finances is certainly exciting, but you can’t get ahead of yourself. Like most other pursuits in life, you must have a plan to be successful. Many people don’t realize that there are several ways to pay off debts. Debt settlement, the snowball method, and bankruptcy all have pros and cons, but you have to learn about them to decide which option is best for you. Before you do that, however, you will have to gather your bills and work out how much you owe.
Missing A Practical Budget
It’s practically impossible to gain control of your money without a budget. People often think that budgeting is too much work, but regret that view when they find themselves in debt. Without a budget, you are likely to overspend, resulting in further debt. This makes it impossible to save or set money aside for bills. Make sure that you write a practical budget that addresses every financial need, including debts. To make this budget work, you may have to reduce spending.
Keeping Those Spending Habits
Humans are definitely creatures of habit. We buy groceries from the same stores, eat at the same restaurants, and grab the same coffee before work each morning. The unfortunate truth is, it’s likely those habits that got you into debt. To clear debts quickly and stay out of debt, you have to change your spending habits. You can start by eliminating unnecessary costs, like your morning coffee, from your budget. Make sure you use price comparison sites for groceries too.
Forgetting To Make Payments
Missing a payment is an expensive mistake to make. Even if you remember to pay the bill the very next day, you could still face a late-payment charge. This would increase your debt, making it harder to live debt-free. By automating your payments, you make it almost impossible to miss one. The only reason why you would is if there weren’t enough money in your account. Even with these payments set up, you can still put extra towards your debt if you have money to spare.
Doing It By Yourself
Many people see debt as an embarrassing subject. Because of this, they would much rather struggle alone than speak up and ask for help. While your friends and relatives are always there for you, there is professional support available too. Credit counseling agencies have years of experience with debt, so know the best advice, regardless of your circumstances. This support is usually free, so there’s no reason why you should try to overcome your debt problems alone.
Falling For Bad Advice
Although there are genuine organizations out there, many so-called credit counseling agencies are only after your money. Because of this, you have to be vigilant. Make sure you do your own research and listen to your gut. Other agencies and people simply offer bad advice, like to use student loan consolidation and refinancing. While these tactics can help, they only do so to a certain extent. This method is used to reduce interest and, in many cases, can’t even do that.
Paying Off Every Debt
When you have multiple sources of debt, it can be tempting to pay off large portions of each one every single month. Unfortunately, this will put a huge strain on your finances. Because of this, you must target debts with the highest interest rates first. Make sure you put extra towards the debt with the highest interest rate, but the minimum on every other one. When that debt is paid off, you should keep working your way through those debts with the highest rates first.
Stopping The Retirement Contributions
Pouring all of your savings into paying off debt does seem like a sensible decision. After all, savings are going to mean very little to you later if you’re drowning in debt. Nonetheless, ignoring your retirement account could prove to be costly too. Retirement savings are necessary for your financial stability later in life. Any current debt shouldn’t stop you from planning for a better future. If you allow it to, you won’t have any money to live on when the time comes for you to retire.
Having No Emergency Fund
Just one emergency vet visit or unexpected home repair can leave you with no way of paying the bills until your next payday. Because of this, you must have an adequate emergency fund before you begin paying off debts. Most would recommend that you set aside three to six months worth of expenses. This is because, if you were to lose your job, it could take this long for you to find new employment. Skipping these savings could land you in even deeper debt later down the line.
Relying On One Income
While your job might appear stable now, there aren’t any guarantees that it will stay that way. In any employment, there is a risk that you could become sick or suddenly be laid off. This would leave you out of work and without an income. For this reason, you must always have more than one source of money. Rather than relying on your savings alone, you should start a side hustle or find a second job. Investing is another option, but you should consider the risk involved.
Ignoring Your Partner’s Spending
When you marry, you agree to love your new spouse for richer and poorer. Unfortunately, if your other half has unhealthy spending habits, you will see much more of the latter. Whether you share accounts or not, your partner’s spending will affect your finances. That is why you should talk about money together. While money and finance aren’t the most romantic topics, you have to be on the same page about saving and spending if you’re ever going to get out of debt.
Taking On More Debt
The very last thing you should do when trying to clear your debts is borrow more money. This will only increase the amount you owe, making it even harder to create a debt-free life. Living on a tight budget isn’t easy, but you shouldn’t take out loans to make up the difference. All that does is sabotage any progress you might have made. Although there are surely exceptions to this rule, you shouldn’t buy what you can afford. Your budget should cover everything you need anyway.
Allowing High-Interest Rates
When you take out a loan, you don’t just pay back what you borrowed. Instead, you have to cover a large amount of interest too. Even if you can’t afford to clear the balance right away, you should allow a high-interest rate. By securing a better one, you can easily save thousands. What’s more, a lower interest rate comes with lower monthly payments. There are several methods for reducing interest rates, but an effective method is moving the balance to another loan.
Spending Any Extra Money
Most people find themselves with extra money now and then. An unexpected bonus or pay rise might seem like a perfect excuse for a shopping trip, but you must resist. While a new television or pair of shoes is tempting, you should put any extra money towards your debts. Inflating your lifestyle, even for a short time, is risky. It can be very difficult to dial back your spending, so it’s best that you don’t increase it at all. There’s nothing to miss if nothing changes in the first place.
Being Inconsistent With Commitments
Committing to a new budget and new spending habits is certainly commendable. However, doing so isn’t going to help unless you’re consistent. If you scrimp and save one month, but splurge the next, your money worries will continue. Stop finding excuses to buy unnecessary things, or your finances are sure to suffer. If you feel like you might slip, then let a loved on in on your plans. Having them know about your commitments will hold you accountable for your actions.
Closing Paid Off Accounts
Once a debt is paid off, you will probably want to close that account right away. After all, this would keep you from taking on debt once again and worsening your troubles. Nonetheless, you should keep the credit card account open. While a credit score is influenced by many factors, the credit you have available is important. By keeping every account open, you will improve your credit score. Because of this, you will have to find other ways to resist borrowing money.
Paying off debt is difficult, but by avoiding the mistakes above, you will make the challenge easier for yourself.