Paying off debt, especially high-interest debt, is one of the best ways to improve your finances, and many families prioritize it.
Once it’s gone, you’ll have more money to spend on important things and reach your life and financial goals faster. You’ll also have more control over your money and your life.
But this journey can be challenging and can be full of bad decisions. So even though mistakes are common on this journey, you shouldn’t make them because you’re reading this blog post.
Let’s look at some common mistakes you should try to avoid.
Getting out of debt is difficult and will take time and effort. Therefore you need strong motivation to succeed. Discover your “why” first. Need to relax more? Get out of a job you despise and not worry about money? Do you feel ready to start a family?
Having a good reason to pay off your debt and always keeping it in clear view will keep you more motivated and ensure you keep going when times become rough.
It’s important to get to the bottom of how you got into debt before you effectively execute a plan to pay it off, and the reason for addressing this is that you want to be intentional and avoid a repeat.
Maybe you have gotten into debt due to
The truth is any situation with debt is only a fruit or a symptom of something deeper. You need to find out the root cause.
Here are some personal finance books that do a deep dive into things like spending habits and would help you uncover your money psychology.
Psychology of money. Timeless lessons on wealth, greed, and happiness
Money Mammoth. Harness The Power of Financial Psychology
You need a plan and strategy for paying off your debt. There are a few things to consider during planning:
1. How much do you owe? If you have a clear sense of exactly who you owe and how much you owe, it will be easier to build an effective plan to become debt free.
2. Which debts do you wish to pay off first? You can use the debt snowball method to pay off your smallest balance debt first for quick victories or the debt avalanche method to save the most on interest payments.
3. Your monthly debt-repayment budget. If you want to get out of debt, you’ll need to make more than the minimum payments. So make a budget, decrease spending, and decide how much you can afford to send creditors each month.
4. What do I do with windfalls such as tax refunds, bonuses, etc?
Imagine that you are paying off debt, and unexpected expenses come up, but you don’t have enough money saved to cover it, that’s not a problem to have but it’s the reality of many people trying to get out of debt.
For many people, one of the reasons they got into debt in the first place was because they didn’t have an emergency fund in place.
Imagine again, a man stuck in a pit and wants to escape but he is digging a hole to get out of it; This illustrates someone trying to get out of debt but doesn’t have any emergency fund.
In many cases what ends up happening is, you might get locked in an endless loop of paying off debt and getting back into debt when an unexpected expense comes up.
Before you put extra money toward your debt, make sure you have at least a small emergency fund or a starter emergency fund in an easily accessible savings account.
This is not your full emergency savings – The rule of thumb for emergency funds is to have 3-6 months of living costs.
However, some financial experts say you should have at least £1,000 as a starter emergency fund before paying off debt.
Just like we said earlier, it’s also not a good idea to stop contributing to your retirement account when paying off debt.
If you are young, it might not seem like a big deal if you don’t save for retirement right now. But you’re taking away financial security from your future self.
At the very least, you should put in enough in your workplace pension to get a match from your employer. If you don’t, you’re missing out on free money that could go toward your retirement.
The truth is the sooner you begin making contributions, the more time there will be for its growth, that’s the power of compounding.
If you can, contribute between 5% and 10% of your gross income towards your pension.
If you have credit card debt, consider a 0% balance transfer credit card. These 0% cards let you transfer credit card debt for a fee to enjoy its 0% rate for a while.
Imagine a credit card debt of £4,000 with a 21% interest rate. If you moved that to a card with a 0% interest rate for 18 months and paid £225 every month, you’d save £600 in interest charges.
Remember that this 0% is an introductory rate, and when it ends, the rate will return to being high. This means that if you don’t pay it off during that time, you could end up in worse shape than when you started.
When hunting for a 0% card, consider cards with the cheapest transfer fees.
While Consolidating or refinancing loans can lower your interest rate from a high-interest loan and simplify your monthly payments.
But remember that most debt consolidation services suggest you pay off your debts over a longer period. This could mean you pay more interest in the long run, so think carefully about any debt consolidation service.
You can only get out of debt with a budget and there are different kinds of budgets, so there’s one for every kind of person.
When you’re trying to get out of debt, you need to have a budget, a budget plans your cash flow (what you earn vs what you spend).
This ensures you are not spending mindlessly, wandering where your money went before the month ends but puts you back in charge.
You can’t just wing it if you want to get out of debt. Instead, you need to be serious about it by making a plan (budget), keeping track of it, and sticking to it.
Without a budget, we are more likely to underestimate how much we will spend and miss chances to save money.
A budget also gives you a plan for how to get out of debt.
By automating debt payoff, you won’t miss any debt payments or pay them late. Also, you won’t have the temptation of seeing that sum of money sitting in your bank account, waiting to be spent.
Automatic payments reduce emotional stress, avoid late fees from late payments and keep you on track. You can automate your repayment by either a direct debit or standing order on your bank account.
After establishing your plan, it’s a good idea to work with someone to keep you accountable. Anyone close to you who you can confide in would do.
For most people, keeping your intentions and plans to yourself will result in abandoning them or taking much longer than expected.
If you are married, your spouse should be your accountability partner because you want them on this journey with you.
Keeping track of your debt payback progress can be a great way to keep yourself motivated and on track.
The truth is, If you want to observe your progress, tracking it is a great approach to do so.
Get our free debt repayment printable and free debt payback spreadsheets to track your journey to financial freedom.
We’ve talked about how not having an emergency fund can cause you to go deeper into debt, but unexpected costs aren’t the only reason you might do this.
Another reason is that you spend more than you earn and pay for your lifestyle with credit card debt, payday loans, cash advance or personal loan.
When paying off debt, you need to stop borrowing money if you want to make progress. This also applies to your credit card: only use it if you can pay off the new expense monthly.
A lot of people are often better off using cash or a debit card instead of a credit card.
Another option is to get a new card that you can use for your everyday expenses and commit to paying off each month.
No matter what you choose, you must be committed live within your means while paying off your old debt.
You’ve paid off that credit card and might be tempted to close the account. But wait, this might not be a good idea for the following reasons,
It can make your credit utilization ratio go up. This is calculated by dividing your credit card balances by the credit limits. Your credit score and credit report is based on many things, including how much you use your credit.
It can also affect your credit history, especially if the card you are closing is the oldest one you have.
If the card has no yearly cost don’t close the account.
You’ll reach several milestones while paying off debt. Celebrate your small victories. It’ll help you attain your goal. Celebrating doesn’t have to cost money, but take time to recognize your efforts.
