Paying off debt is your first step towards financial freedom. Aside from this, knowing that you do not owe anyone anything allows you to live a fuller and happier life. You don’t have to worry about your car or home repossessed, answering numerous debt collection calls, your social life plummeting or working a job you hate to pay off your debt.
However, even as we try to achieve this seemingly elusive financial goal, we still end up being caught up in this never ending debt cycle. There are some common mistakes people make that gets them in debt, keeps them in debt and makes it difficult for them to pay off debt. In this article, we are going to look into what these common mistakes are and find out how we can avoid them. Let’s get started:
In this article
1. Not knowing what got you into debt
Familiarising yourself with your debts is what will jolt you into action. Do a thorough evaluation of self and find out what got you in debt. If you have any poor financial habits, identify them and find ways in which you are going out of them. Some poor financial habits that can have you strapped in heavy debt include overspending, living above your means, not saving money and failing to budget. Once you have identified what got you into debt, you can now start working your way around how to avoid these common money mistakes.
2. Not having a debt repayment plan
One of the biggest mistakes people make when paying off debt is not having a plan. A debt repayment plan will show you the debts you have, how much you have to pay off the debts and the strategies you are going to use to clear these debts. While creating a debt repayment plan, start by listing all of your debts, including the interest rates and minimum payments.
Determine how much money you can afford to put towards debt repayment each month, and prioritise your debts based on their interest rates. Many people make the mistake of just paying the minimum amount due on their debts every month and this can result in paying much more interest over time and prolonging the debt repayment process. To avoid this mistake, there are several debt repayment strategies you can use based on your financial situation and preference, for example the snowballing method or the debt avalanche method.
3. Not paying off the right debt first
Do you have any debt that frustrates you into paying off fast? If yes, you should consider paying it off first. Chances are this debt accumulates high interest, you are already getting numerous calls from your lenders or your credit worthiness is at risk. A common mistake I see people make when they pay off their debt is ignoring high interest debt with negative tax implications. Any debt which accumulates high interest means you will have to pay more. When this goes on, it will become unmanageable and difficult for you to get out of this situation.
If you only make the minimum payment on a high-interest debt, it can take years or even decades to pay off the debt, and you will end up paying much more in interest over time. To avoid this common mistake, with your written list of debts, rank them in order of those which have high interest and make extra payments on those debts first. Consider transferring high-interest credit card debt to a card with a lower interest rate or consolidating your debt into a personal loan with a lower interest rate. Once you do this, your debts become more manageable and less stressful to pay off.
4. Not having an emergency fund
Another common mistake people make when paying off debt is neglecting to build an emergency fund. An emergency fund is the safety net you fall back on when life throws its curveballs at you. In the case where you lose your job today, get laid off or even have a medical emergency, do you have your finances planned out or will you go out on a loan-seeking spree?
Without an emergency fund, unexpected expenses can derail your debt repayment progress and force you to go further into debt. To avoid this mistake, prioritise building an emergency fund before focusing solely on debt repayment. Aim to save three to six months of living expenses in an emergency fund. Once you have a solid emergency fund, you can focus more on debt repayment.
5. Not saving for retirement
Saving for retirement is the biggest investment you can make today. No one wants to work till they die. And the only way you are assured of living a comfortable and financially free life is by starting to save for retirement. Most people make the mistake of not thinking about their financial future, thereby ending up with limited resources and having to take out loans to live by when there is no steady income. To avoid this mistake, you can look at different retirement plans and start working towards your retirement today.
6. Not using debt relief programs
Another common mistake people make when paying off debt is failing to negotiate with creditors. If you are struggling to make payments on your debts, it may be possible to negotiate with your creditors to lower your interest rate or payment amount.
To avoid this mistake, reach out to your creditors and explain your situation. Ask if they are able to lower interest on debt, reduce payment amount or even extend the period for which you are required to pay the debt off. Before this, do your research and find out the debt relief programs your creditors use and make the best of it.
7. Not tracking your spending
To track your spending, you have to have a budget. A budget is a spending plan for your income. Without a budget, it can be difficult to know exactly how much money you have coming in and going out each month. This can make it difficult to allocate money towards debt repayment and prioritise your expenses.
Failure to create a budget is a common mistake people make when paying off debt. To avoid this mistake, create a budget that includes all of your income and expenses. Identify areas where you can cut back on expenses to free up money for debt repayment. Consider using a budgeting app or spreadsheet to help you track your spending and stay on track.
Paying off debt is a major financial goal for many people. Whether it’s student loans, credit card debt, or a mortgage, being debt-free is a great feeling. However, paying off debt can be challenging, especially if you still make these common mistakes while paying off debt. These mistakes can slow down your progress or even make your debt situation worse. If you’ve been able to point out some of these common mistakes in this article, now you know how to avoid them.