People tend to make many costly mistakes when trying to pay off their debt. As a result, it takes a long time for them to clear the debt successfully. If you are currently in debt, you must acquaint yourself with the common mistakes to avoid when paying off debt. Besides, you may not be aware that you are making these mistakes.
You need to be appropriately informed to identify most of these mistakes. Hence, this post has compiled helpful information on the typical mistakes you should never make in paying off your debt.
By delving into how people make these mistakes and the outcomes thereof, you would be able to guide your steps as you look forward to paying off your debt successfully.
Why Is Paying Off Debt So Hard?
Paying off debt usually becomes difficult when there is not enough cash flow to carry out the repayment plan. When your take-home pay is not sufficient to cover your expenses and pay for the debt as well, you will struggle greatly to pay off whatever amount you owe. In this case, you would have to find creative ways to increase your income.
What Should You Not Do When You Pay Off Debt?
Incurring more debt is one thing you should never do when trying to pay your debt. By incurring more debt, you are drastically slowing down your progress of paying the present debt. Sadly, if this continues, you will probably not be able to pay the debt.
Hence, as you do your best to clear your debt, make sure you do not venture into anything or make any decision that would bring in more debt.
Why Do People Incur So Much Debt?
People tend to incur a lot of debt because they believe they can’t afford what they bought for credit or took a loan for. While this can seriously harm your finances, you must know that whatever you intend to buy can be purchased if you plan well enough for it.
Instead of presuming that you don’t have enough money to make the purchase, sit down and devise simple yet effective strategies on how the item or items can be bought directly from your bank account, using your own money.
The Most Common Mistakes People Make When Paying Off Debt
One of the most common mistakes people make when paying off debt is failing to readjust their expenses.
The moment you embark on the journey to repay a loan or clear your credit card debt, you must review your expenses and find ways to cut down on costs. It will help if you do this so that your income is enough to cover the debt repayment and other conventional expenses.
Remember that as soon as you begin to pay off debt, you have incurred a significant expense, thereby increasing your overall expenses, and since your income is not increasing, you must find brilliant ways to decrease your expenses so that they can match your income. This is why it’s advised to evaluate and readjust your expenses when you start paying the debt.
What Happens To Your Finances When Your Debt Is Paid Off
By knowing the mistakes to avoid when paying off debt, you would be able to complete the payment successfully in due time. This would make you excited and fulfilled.
But besides the excitement or relief you may gain from paying off your debt completely, your finances would be redeemed from some sort of setback. Basically, debt would no longer be a restraint to the growth of your finances.
In addition, here are some of the benefits you would begin to reap as soon as you pay off your debt:
- You would be able to use your money for other essential purposes.
- You would be able to save.
- Your income would be budgeted properly.
- You would be able to accomplish certain financial goals.
- You would regain your peace of mind.
Debt Mistakes To Avoid
While it’s important to pay off your debt completely, you also need to acquaint yourself with some of the typical mistakes you must avoid in order to accomplish this aim.
Here are some of the debt repayment mistakes that can jeopardize your goal of paying off your debt:
1. Failing To Have A Payoff Strategy
One of the several mistakes to avoid when paying off debt is not having a feasible strategy on how to successfully pay off the debt within a favorable period of time.
Although it’s important to constantly remind yourself that you have debt that needs to be paid off, that’s not enough to ensure success. It would be best to carve out actionable goals and a specific plan concerning how you intend to pay off the debt.
To start with, you must understand that it doesn’t make sense to pay off all debt simultaneously. In fact, that’s not a feasible plan. Some debts can be paid off early, while some need time to be paid off. Hence, if you have several debts to pay, you need to determine the one to be paid off first.
Also, it would help if you determine how much money you can devote to the debt repayment. To do this, you would have to examine your monthly take-home pay and your expenses. Having subtracted all your necessary expenses from your income, you would know how much money you have left to pay off debt.
On the other hand, you can reduce your expenses significantly so that there can be enough money to repay your debt every month.
2. Not Having An Emergency Fund
Just because you have set a goal to pay off debt doesn’t mean you should forget other crucial financial objectives, such as building an emergency fund.
If you are currently trying to pay off debt and don’t have an emergency fund, you are actually making one of the common mistakes people make when paying off debt.
This is because while paying your debt, you would barely have extra cash in your bank account, and if impromptu expenses such as medical bills or car troubles show up, you would be financially stranded. You might even have to take a loan to bail yourself out, thereby incurring more debt.
With an emergency fund in place, you would be able to cover most of the expenses that you are not always prepared for. Thankfully, building an emergency fund is not a hard nut to crack. Here is a helpful guide that will show you how to build an emergency fund using a simple step-by-step process.
3. Incurring More Debt
Incurring more debt while paying your present debt is like fetching water with a basket. It’s one of the mistakes to avoid when paying off debt, whether you are repaying a huge loan or just a small credit card debt.
This is why it’s important to set up an emergency fund, and it will save you from continuing to get deeper into debt. But sometimes, emergency expenses are not the only reason people incur more debt. Instead, people tend to incur more debt when they don’t have their spending under control.
The moment you spend recklessly, you would begin to pile up credit card debt, and if you don’t save yourself in time by guiding your spending habit, you end up getting into a debt trap.
The only way to avoid incurring more debt is by learning how to manage your income ingeniously. You can cut down on expenses and spend money only when you have to. Cutting down on expenses is a great way to live below your means and avoid debt.
On the other hand, you can decide to increase your income. There are many creative ways to make extra cash every month, aside from your usual paycheck.
Lastly, one good tip to help you avoid getting deeper into debt is using cash instead of credit cards. This spending method may be difficult initially, but if you keep at it, you will get used to it and realize it’s a brilliant way to avoid spending too much and incurring debt.
4. Failing To Budget Your Income
Budgeting is one of the best financial decisions you can ever make, whether you are earning a lot of money or not. When paying off debt, budgeting should not be left out.
You need to build a budget that contains all the expenses you would have to make in a month, including the debt you are paying off. Once you make debt repayment one of the goals on your budget, it becomes easier to pay off because you’d see it like every other typical expense.
Moreover, budgeting your income would enable you to spend wisely and avoid piling up debt, and it remains one of the best ways to protect your income and fight against impulse buying.
Also, having known that failing to budget your income is one of the mistakes to avoid when paying off debt, you should learn how to budget your money effectively as soon as possible.
5. Not Identifying The Cause Of Your Debt
If you don’t know the source of a problem, it becomes impossible or tough to solve it. This principle is also applicable when it comes to paying off debt. As of today, one of the many mistakes made when paying off debt is failing to identify the exact cause of the debt.
For instance, if you get a mortgage, you already know why you incurred the debt; perhaps it’s because you need to purchase a house or any landed property. It becomes easier to focus on paying off the debt this way.
But in a situation where you pile up credit card debt, it would be difficult to pinpoint what you spent the loan on.
6. Doing It Alone (Without An Accountability Partner)
One of the mistakes to avoid when dealing with debt is not having an accountability partner.
Sometimes, paying off debt alone can become difficult or unmotivating when doing it alone. It will help if you have an accountability partner with whom you can share your progress and devise ways to pay the debt faster. It could be your spouse, a family member, or a close friend.
When choosing an accountability partner, you must pick someone who’s highly motivated to go on the debt repayment journey with you; someone who’s likely to help you identify some mistakes to avoid when paying off debt.
Also, it will be best to have someone who would constantly keep you on your feet, making sure you always fulfill your objective of paying off the debt.
7. Not Tracking Your Progress
An excellent way to complement your efforts toward paying off debt is to monitor and track your progress.
By keeping track of your progress, you will stay motivated and encouraged to put in more effort to ensure your debt is paid off in due time. The moment you see your debt balance falling significantly, you may be motivated to pick up a side hustle to generate more money and speed up the repayment.
The moment you fail to track your progress, you have become a victim of one of the mistakes to avoid when paying off debt. It’s crucial to know how you are progressing.
This is another reason it’s advised to have an accountability partner; it becomes much easier to monitor your progress when there’s someone who’s always around to see how you keep up with the debt repayment.
Final Thoughts On Debt Repayment Mistakes
Avoiding the mistakes mentioned above while paying off debt is crucial to your success in completing the repayment. Although it may prove difficult at first, you must learn to maintain consistency. Don’t fail to create a feasible debt repayment plan with your partner and track your progress as you go on.
To speed up the repayment, you can make extra payments (if the terms of your debt allow it). But most importantly, don’t be oblivious to the mistakes to avoid when paying off debt.
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