So you made the decision to get out of debt. Now what? If you haven’t started to budget yet, this is the perfect first step. You’ll need to know exactly how much money you have coming in each month and how much money is going back out. You’ll want to track your budget for a few months to get an idea of exactly where your money is going before you make any drastic changes. Then you’ll be ready to start your debt free journey. Don’t be blindsided and make a debt payoff mistake. It’s easy to make these common mistakes when you first start budgeting and getting out of debt.
Debt Payoff Mistakes You May Be Making
Debt Payoff Mistake: Neglecting the Root Cause of the Debt
You will want to figure out why you went into debt. If you aren’t sure why you went into debt in the first place it will be difficult to pay off. You’ll be more likely to go back into debt.
Were you laid off from a job and relied on credit cards to pay your bills?
Are you an emotional spender?
Was your credit card used as an emergency fund?
Once you know the root cause of your debt you’ll be able to fix that issue first. If you do not get to the root of the problem you’ll never truly make progress. You’ll just mask it and will most likely find yourself in debt again.
Debt Payoff Mistake: Pay Extra on All of Your Bills
If you begin your debt payoff journey by paying extra on all of your bills it will be hard to gain traction. You’ll end up discouraged and may quit. Decide on what debt repayment method you will be using. You’ll want a plan for your debt payoff before you even get started. Understanding how much debt you have and how it will be paid back will give you a clear vision for what needs to be done to complete your debt free journey.
Debt Snowball vs Debt Avalanche
These two debt repayment methods warrant their own post but I will give a short synopsis of what the methods are.
The debt snowball is listing all of your debts from largest to smallest. You’ll want to pay off the smallest debt first then roll that minimum payment into the next smallest debt. You’ll continue to add the payment to the next debt on your list until all of the debts are paid off. Each debt paid off adds a little more snow to your snowball.
The debt avalanche is listing all of your debts in order by the interest rate. You’ll start by paying off the highest interest rate first. Then take that payment and move on to the debt with the next highest interest rate. You’ll continue this pattern until the debts are all paid off.
The debt snowball is successful because you’ll have small wins along the way. It helps you build momentum. The debt avalanche is successful because you’ll be paying less money interest over the long term. Either approach is acceptable, do what works for your current situation.
Please note with either method you’ll be making minimum payments on all of your debts.
Debt Payoff Mistake: Your Extra Payment is Not going toward Principle Only
You’ll want to understand how your payment is being applied to your account. Depending on your lender there are two things that may happen with your money.
- The lender automatically puts your extra payments toward principle
- The lender prepays your bill for the following month resulting in repaying interest
The principle is the amount of money you borrowed. You’ll want to ensure the lender is applying any amount over your minimum payment is going toward the principle of your account. This will pay down your account quicker and you’ll spend less money on interest.
Debt Payoff Mistake: You are still using the Credit Cards
If you are still using the credit card while paying off your debt it’ll be like a hamster wheel. You’ll be paying off debt but your balance will still be going up or staying steady. You’ll just continue on this vicious cycle. I recommend switching to a cash system when paying off debt. You’ll want to use your debit card or physical cash for all of your purchases. This will ensure that your payments are actually going toward paying down debt.
Debt Payoff Mistake: You are Not Prioritizing your Debt Payoff
This is a hard one to add to the list because my husband and I have found ourselves not making our debt payoff a priority in the past year. I talk about finding balance while paying off debt but you need to make debt payoff a priority in your budget. If you do not prioritize your debt payoff you’ll find yourself falling off the wagon and not making any progress. You’ll feel like you are spinning your wheels and this is when you’ll decide to throw in the towel and give up. This is not what you want. Make your debt payoff a priority and get it done!
Related Content: Should I Be Traveling While in Debt?
Debt Payoff Mistake: Not Having a Reason Why
Why do you want to get out of debt? What is driving you to actually put in the work and get it done? You need a reason why. You need something bigger than “I want to be debt free.” Look further than right now. Do you want to be debt free so you can travel the world? Maybe you want to retire early. Figure out why you want to be debt free and make it known to your family and friends. They’ll help keep you on track.
Debt Payoff Mistake: You Don’t have an Emergency Fund
You need an emergency fund. Bottom line. The emergency fund will save you from those unknowns that will come up. If you do not have an emergency fund you’ll find yourself swiping the credit card and going further into debt. You’ll want to find an emergency fund amount that works for your family. I would not have less than $1000 readily available for emergencies.
Debt Payoff Mistake: I used 0% interest financing
Any money you borrow is debt. Regardless of interest rate anything you owe to someone else is considered a debt. You’ll need to pay it all off. Just think how amazing it will feel when you no longer owe anyone money! You’ll finally be free from those chains.
Debt Payoff Mistake: You Are Not Taking Collections into Account
If a debt has been sent to collections you still owe the money. They may not be knocking at your door right now but you still owe the money. If you are not being sued for the debt I suggest putting collections at the end of your debt payoff. When you are ready to tackle collections you’ll have leverage if you have money in the bank. I suggest saving a portion of the collections debt due and try to settle with the company. It may take some persistence from you but these debt collectors bought your debt for pennies on the dollar. You’ll need cash on hand for a settlement.
If you are not sure if you have accounts in collections you can view your credit report for free at annualcreditreport.com.
Debt Payoff Mistake: You haven’t Quit Your Daily Latte
Driving through and grabbing a cup of coffee every morning adds up. Start making your coffee at home. Plan your meals ahead of time so you aren’t finding yourself in a restaurant or a fast food line. These little purchases throughout the week really add up. You could be making some major progress if you are willing to cut back on the non-discretionary spending.
Debt Payoff Mistake: You are still Shopping
If you find yourself still strolling the mall, Target, WalMart etc you need to remember you why. Even if you are just window shopping your more likely to spend money just by being in the store. Find a free hobby or pick up a second job. Do whatever you can to stay out of the store! It really does make a difference.
Debt Payoff Mistake: Worrying About Your Credit Score
Yes, your credit score is important. It determines how much you pay for rent if you can get a cell phone, and sometimes a job. Your credit score matters when you are looking to take out new debt. However, if you are intentional about paying off your debt and moving toward a debt-free lifestyle your credit score shouldn’t matter so much. Did you know paying off your credit card debt will actually help improve your score? It has to do with your utilization rate on your cards. So, forget about your credit score for now and focus on paying off that debt!
Paying off debt is a difficult road to be on.
You’ll need to make a plan and be intentional with your money. It is easy to catch yourself in a debt payoff mistake and veering off track. Center yourself again and remember why you are doing this. Becoming debt free gives you so much freedom over your life and your money. It is the power that most people don’t have and a lifestyle that only a few enjoy. Debt freedom is becoming more popular but not everyone will make it. It is easy to get stuck in the comparison trap and wanting the latest and greatest gadget, car, bigger house etc. A debt payoff mistake could set you back years on your ultimate goals.
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