5 Biggest Mistakes People Make When Paying Off Debt
The decision to get yourself out of debt is a life changer, if you are willing to make the necessary commitment that goes with that.
Getting out of debt involves more than just paying off a few credit cards. It means:
- changing spending habits
- learning how to budget
- knowing who and how much you owe
- prioritizing debts
- creating emergency and retirement funds
In other words, there are a lot of decisions that need to be made and it’s possible – if not probable – you’ll make some mistakes along the way.
Here are some you can avoid that will make it easier to get out of debt.
Mistake: Same old spending habits.
People are creatures of habits and spending money is no exception. We shop at the same stores, eat in the same restaurants and drive the same car, because it’s comfortable. It’s also costing you more than you can handle financially.
Remedy: If you won’t change your spending habits, you won’t ever get out of debt. Start with your morning habits (have your coffee and breakfast at home). Go to lunch with a brown bag, not a wallet. In the evening, watch games or movies on TV, while eating a home cooked meal. You will see an immediate impact on your daily spending habits.
Mistake: Not creating a practical budget.
It is difficult, if not impossible to gain control of your finances unless you have a budget.
Remedy: Develop a realistic budget that addresses financial needs like housing, food, health care, insurance and education, but still creates room to make payments on debt. Put away the credit cards and only pay with cash. That might mean reducing (or eliminating) things like dining out, entertainment, shopping for new clothes, cars or electronics, but if you’re serious about eliminating debt, operating with a budget and paying cash is a great start.
Mistake: Trying to pay off multiple debts at once.
Consumers with multiple sources of debt – credit cards, mortgage, student loans, etc. – often try and address each one every month.
Remedy: Go back to your budget, trim spending to bare bones on everything but essentials, and create a $100 (or preferably $1,000) surplus that goes directly at the credit card with the highest interest rate. When that’s paid off, go after the card with the next highest interest rate and keep going until all credit card debt is eliminated.
Mistake: Closing accounts when they are paid off.
Remedy: The solution to this problem is simple: Pay off the account, but don’t close it. The two Canadian Reporting Agencies, Equifax and Transunion, rely not only on how much money you owe, but how much credit you have available. Having credit available, but not using it, shows restraint and can improve your score.
Mistake: You decide to stop contributing to a retirement account. While it seems to make sense to devote every dollar possible to eliminating debt today, in the long run, it’s a costly mistake.
Remedy: Contribute at least 5%-10% of your income to retirement savings as soon as you begin working and don’t let eliminating debt cut into that. Time is the most powerful tool in retirement savings. The earlier you start contributing to your retirement, the better off you’ll be at retirement.
If you've been trying to pay your debt off on your own but are struggling, contact our office today. We are here to help.