The Five Biggest Mistakes People Do When Paying off Debt

Stressed woman

The decision to get out of debt is a life-changing one. However, it is far from easy. To manage our debts, we have to change a lot—the way we spend, how we budget our money, what we choose to pay off first, and how to create emergency fund and savings. Most people want to get out of debt. Who doesn’t? But what they fail to realize is that getting out of debt is more than just paying your lenders off. It’s about a complete change in your lifestyle.

When you think about it, paying more than the minimum amount due of your home loans and credit cards should finish them off faster, right? Yes, but only if you completely change the way you spend your money, too. If you keep on using your credit card to make unnecessary purchases, you will never get out of debt.

Same Old Spending Habits

How much do you spend on those fancy dinners you call treats? How much gas does your car guzzle? If you are going to eat at the same fancy restaurants, keep the gas-guzzling car, and shop every week, you’re never going to finish off your debts. You’ll pay off more than the minimum amount due of your credit cards and use that same card during the weekend. It’s a cycle that you will only break when you change your lifestyle.

Trying to Do It Alone

Dealing with debt is not the end of the world. But, dealing with it alone could be the end of your finances. Reach out to friends, relatives, and credit counselors. People are too sensitive to discuss how much they owe the government and financial institutions. What you don’t understand is that you have so much to learn from people who have gone through the same situation. A credit counselor, for example, can advise you on debt management, credit consolidation, debt settlement, and even the possibility of bankruptcy.

Do you have a friend who’s great at budgeting and saving money? Ask for help. And if you are still uncomfortable with that, read blogs, articles, journals, and books on how to manage your finances better.

Not Being Practical with Your Budget

Your budget should be realistic. It means that you need to have money for necessities such as housing, food, clothing, health care, insurance, and education. What a lot of people do is spend less on food by buying canned goods and other unhealthy items. But do you know where this leads? You eventually get sick. And then, you’re not only worrying about your current debts, but you also have out-of-pocket costs after a gastroenteritis procedure.

You have to figure out what’s essential to your well-being. Eating healthy food, for example, is still part of that even if you are trying to pay off debts. A realistic budget means reducing and eliminating unnecessary things like eating out, shopping for expensive clothes, and buying a new car. And if you’re committed to reducing your debts, you should start paying with cash rather than with your credit card.

Paying off Everything at Once

Paying

There are two methods of paying off debts: the avalanche and the snowball method. The avalanche method refers to paying off the debt with the highest interest rate while paying off the others their minimum amount dues. The snowball method is when you pay off the debts with low-interest rates so that you get a “win” earlier. It’s easier to finish paying off loans with low interest.

Out of these two, the most practical method is the snowball no matter the outstanding balance. It tackles high-interest loans first. This means that your debt will not gain interest on interest. After those have been paid off, you can keep going until all your debts—including those with low interest—have been paid.

Not Setting Aside Money for Emergency and Retirement

Even during your most irresponsible money phase, you should be saving money for emergencies and retirement. Do you want to work until you’re in your 70s? Though many older people are still gainfully employed past their retirement age, you’d want to have the option of leaving your career behind. But if you don’t contribute to your retirement account, you won’t likely have this choice. Time is the most important factor in saving for retirement. The longer you contribute to the fund, the better you’ll be once you retire.

It is not impossible to get out of debt. It is challenging and life-changing, though. It requires you to sacrifice many of the conveniences you enjoy now. With these sacrifices come the exciting possibility of one day waking up debt-free.

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