Taking action to eliminate debt can be life-changing. You will no longer spend a portion of your paycheck to pay yesterday’s purchases, and you will find more discretionary income each month for other financial priorities. Whether you have goals to save more for retirement, increase financial security through an emergency fund, travel more or take up a new hobby, you can find money to pay for these desires, when you eliminate existing credit card debt.
To achieve the desired rewards, you must make a commitment to change your spending habits enabling you to become debt free.
Not all debt reduction strategies are the same and making common mistakes can prevent you from reaching your goals. The seven most common mistakes include the following:
Failing to Develop a Budget
Reducing debt requires you to reallocate current income towards high-interest balances. A budget helps you track spending patterns and make the appropriate adjustments. Without a thought-out plan, you will not have the ability to “find” extra money and track progress.
The purpose of a personal budget is to guide spending decisions and eliminate low-value expenses in exchange for higher priority items. To develop a working budget, take inventory of fixed expenses such as housing, utilities, car, and insurance payments. Then tally your minimum debt payments along with money needed for food, toiletries, and entertainment. This process gives you a visual representation of current spending and the information needed to locate savings.
Implement one or more saving strategies to free up money for your debt reduction goals.
Not Changing How You Spend
Believing you can pay off debt without making any changes, is not realistic.
The first step is to put away credit cards and resolve to use cash or a debit card for immediate needs. Moving to a cash system will prevent adding new debt.
The second step is critically looking at your spending habits to find easy ways to cut back. Instead of buying a daily latte, make coffee at home. Instead of purchasing lunch, bring a bag lunch to work. Eliminate the cleaning service, cable, or gym membership to find the funds needed to pay down debt.
In some cases, making small adjustments to your budget can free up several hundred dollars a month to earmark towards debt reduction. In other cases, you might need more drastic lifestyle changes to get out from under a heavy debt load.
While you want to reduce spending, do not eliminate all entertainment. Instead, include some fun in the budget. Living on a strict budget does not mean you have to give up all enjoyable activities. If you want to enjoy a nice dinner, find a discount and then put it in the budget. A night out with friends can work as long as you plan for it. Knowing when to say “Yes,” and when to pass on impromptu spending can make the difference between successful debt reduction and frustration.
Trying to Pay Off Too Much At Once
Prioritize high-interest debt rather than paying a little extra each month on all your cards. When you have high amounts of debt, the process of paying them down can overwhelm you without a constructive plan. Breaking the process down to one debt at a time will help you see progress quickly and stay motivated.
Not Contributing to Retirement Accounts
While you may have a few decades before retiring, it takes years to save enough for a financially stable retirement. Not saving for your future will hurt your long-term financial stability. Waiting until you are debt free before funding retirement could leave you with no retirement money when you want to leave the workforce. Logically, it might make sense to use every possible dollar to pay off debt, due to high interest, debt reduction can be an ongoing challenge.
Today, retirees can spend as much as three decades in retirement. Living a longer life has its own challenges, making it more important than ever to save throughout your working career. Putting a small percentage of pre-tax income towards future needs will add up.
Forgetting to Put Money Away for Emergencies
Failing to have emergency savings can lead to charging unexpected expenses, sabotaging efforts to get out of debt. You could pay down $500 and then have an unexpected bill of $600 wipe out months’ worth of effort. Saving even 3 to 5% of your paycheck will give you a cushion when the car breaks down, or an illness creates an unexpected medical bill.
Approximately 57% of consumers do not have an additional $500 in a saving account to cover an unexpected expense. Direct depositing a little each payday is an effective way to siphon money into savings without requiring major sacrifices in spending.
Not Confirming the Accuracy of Your Credit File
Credit reports have high rates of error, which can impact your life in unexpected ways. Employers use credit to vet job candidates and can impact a promotion. Insurance companies use credit to set rates, and utilities use it to determine deposit requirements.
In many cases, those with credit challenges have more inaccuracies than individuals who never made a late payment. It might be a double submission from an original creditor and a collection agency or failing to record a payoff correctly. Ensuring each creditor makes an accurate reporting of your account history can help you, even if you do not need a new loan.
Review your free report once each year from each of the three credit bureaus: Equifax, Experian, and TransUnion.
Not Knowing Who Can Help
When you find yourself constantly restarting your debt reduction plan, because you struggle to follow through, you might need the assistance of an expert. Debt management companies can walk you through the options ranging from counseling, consolidation, debt negotiation programs, or even bankruptcy. They understand the laws in place to protect your rights and the process required to become debt free.