Common Mistakes to Avoid When Paying Off Debt
Are you trying to dig yourself of debt, but feel like you are stuck in the mud? If the answer is yes, you are not alone. Eighty percent of Americans are caught in the chains of debt and struggling to create a secure financial future for themselves and their families.
Debt is often unavoidable. From student loans and credit card bills to home mortgages and car loans, debt is all around us. However, with the right guidance and tools, financial freedom is always possible.
If you are starting your journey to a debt-free life, congratulations! You are one step closer to achieving financial success. Paying off your debt can improve your health, work, relationships, and almost every facet of your life! However, keep in mind that becoming debt-free is more than just paying off your credit cards. You will be making many important decisions along your journey that will give you a higher level of financial security, and that isn’t always easy!
There are many mistakes you can make along your journey that can sabotage your efforts to improve your financial life. That’s why we have gathered five common mistakes to avoid while establishing the best practices on your way to a debt-free life.
1. Not Having a Payoff Plan
It is important that you set clear goals and create a specific plan for how you’ll start to tackle this financial task. These three things you should determine when creating your pay off plan:
- Which Debt You Want to Pay Off First
If you owe money in a lot of different areas, you’ll want to make sure you know which of these debts you need to pay off first. Although the goal is to pay off all of your debts, it may be out of reach to pay off all of them at once. There are two methods that you could use when deciding which debt to pay off first. There’s the avalanche method that consists of paying off the debt with the highest interest rate first. This means you will be putting as much money as you can on this debt while making minimum payments on your other debts. This method can help you save money in interest charges. The second method is the snowball method, which involves paying off your smallest debts first, which will motivate you to keep going as you see various debts disappear. Whatever strategy you chose to adopt is up to you, or you may want to reach out to a debt expert like Bill to help you decide which is right for your situation!
- How Much Money You Can Devote to Debt Payment
It’s crucial to pay more than the minimum you owe if you want to make real progress on becoming debt-free. That is why you should think about how much money you are willing to devote to your debts. Set up a budget, look for ways to cut on spending, and figure out how much you can devote to beginning to chip away at those debts.
- How Much Money You Owe in Total
This is one of the most important things you want to determine before paying off your debts. If you do not have a clear idea of who you owe and how much you owe, it will be ten times harder to create an effective plan to become debt-free. Take your time and write down all the debts you have. Figure out how much money you owe and the interest rate of each debt. This way, you can decide which debt you want to pay off first.
2. Signing Up for Debt Relief Programs Without Understanding Them
It is important to understand that debt-relief programs typically take three to five years to dig you out of debt, so, you need to be patient. If a debt-relief program makes promises to help you get out of debt quickly, you should start looking elsewhere. You want to make sure that any organization you choose is licensed and does not have a record of consumer complaints. Remember, patience is key when working your way out of debt!
3. Keeping the Same Spending Habits
If you want to get out of debt, you MUST change your spending habits. No one can do the same thing over and over again and expect to get different results. You must identify what you can reasonably afford to spend within a given month and change your spending habits accordingly. Although you might think this is an easy thing to do, it certainly isn’t. You will need to create a realistic monthly budget and cut off unnecessary spending. Make sure you review your expenses and decide which ones are necessary and which are pleasure expenses. Making small cuts to your daily spending can make a big difference in the timeline to becoming debt-free.
4. Not Setting an Emergency Fund
It is impossible to predict unemployment, car accidents, or car repairs, that is why an emergency fund is so crucial. It only takes one unexpected car repair or an emergency visit to the vet to leave you with no way to pay your bills until your next paycheck. We recommend you put three to six months of expenses into a savings account to cover for any future emergencies. You may think that saving money for emergencies when you want to devote every dollar to pay off your debt is counterintuitive. However, if you have no money set aside when an unexpected expense arises, you might be at risk of falling further into debt. That’s why you should set aside at least 5% of your income for an emergency fund. Do this until you have at least three months of expenses covered. This way, you will be covered for any unforeseen emergencies, and you will not have to borrow money that will pile onto existing debt.
5. Not Addressing the Causes of Your Debt
Paying off your debt isn’t the only important aspect of a debt-free life. It’s also crucial that you understand how and why you got yourself into debt in the first place. If you do not take the time to understand what caused your debt troubles, you will likely end up struggling with the same debt in the future.
Two reasons why people end up in debt is that they spend more than they can afford, or they do not have an emergency fund. You will need to identify the why and how of your debt and make the changes accordingly. If you are overspending, then you need to make some cuts to your expenses, and if you don’t have an emergency fund, you should create one as soon as possible. Understanding the root cause of your debt will allow you to avoid falling back into debt.
For more information on how to plan for a debt-free future, talk to our experienced team at Mid America Debt Relief.
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