Do you often get overwhelmed by your debt?
Or perhaps you see all the debt and you wonder how long will it take you to pay it all off.
We have been there. And a lot of people often make the minimum payments and pay off the loan in full term which is 10-20 years. And now you wonder whether that’s going to be you for the next 10-20 years?
We can very well imagine the stress it puts you through. And feeling like you have a constant burden on your shoulders.
But, there is some good news.
It is possible to pay off your debt quickly and you are not alone. Let’s talk about the common mistakes people make on their debt free journeys.
And let’s try and analyse how many are you making right now.
Most common Mistakes people make while paying off their debt:
#1: NOT MAKING A BUDGET:
I can not stress this enough. I often talk about budgeting here on the blog and it is the one thing that helped us the most when we were paying off debt. And even after being debt free now, we continue to budget because it is such a great way to save money.
Because without knowing how much money is coming in, how much is going out and how much do you have left, you can’t make a plan. And by not making a proper plan, you are setting yourself up for failure.
You are essentially putting a blindfold and shooting in the dark. You can’t hit a bullseye that way and you certainly can’t pay off your debt.
So, repeat after me, Budgeting is my best friend.
#2: Adding more to the debt:
Raise your hand if you are on a debt pay off journey, but you bought something totally extravagant because you still have your credit cards?
Yes, Karen! Raise that hand.
This is probably one of the silliest mistakes people make on their debt pay-off journeys. Just because you have paid off a sum of your debt doesn’t mean you are free to add more debt now.
And if you find yourself unable to resist the urge, freeze your credit card, get it cancelled, cut it in halves. Whatever you need to do, to stop adding more debt to your already existing debt.
And the worst part? These are mostly low value purchases that provide a short term gratification. And you are left with more burden on your shoulder in terms of that debt.
#3: Not having a side hustle:
If you have the time and have a lot of debt to be paid off, then you MUST explore a side hustle. More money means paying off your debt relatively easily and quickly.
And if you do not have a side hustle yet, it’s time you get cracking. Having more extra money will help you pay your debt more quickly. And as for the ideas of side hustle, there is no limit. There are so many side hustles these days that you can get started with low investment.
#4: Not having an emergency fund:
Before you start paying off your debts, it’s super important to have an emergency fund. I get that you probably want to spend all the money you can spare to pay off your loans. But you need an emergency fund anyway, because things come up every now and then and you never know when you might need some extra cash.
Having an emergency fund set up will take that extra pressure and stress off your shoulders. It will also give you a little breather knowing that you are equipped to handle an unprecedented situation.
Generally speaking, it is great to have about 6 months of your total expenses in your emergency fund. It means that you can sustain for 6 months without a job. However, if you are looking to payoff your debts, having a 3 month emergency fund is still good enough. And the rest of the money could go towards your debt.
#5: keep paying minimum:
If you keep paying the minimum amount due towards your debts, you will stretch your debt for the longest time possible and will end up paying more interest.
And it’s one of the most common mistake that people often make when trying to pay off their debts. So make sure you are paying every single dollar you can spare towards your debts.
#6: Keeping high interest rates:
I am surprised that a lot of people don’t consider refinancing their loans and keep paying high interest rates. If you are making this mistake as well, it’s time to consider refinancing. You could also consolidate all your debts into one and get a lower interest rate on it.
Another great option is to pay off debts with the high interest rate first while paying the minimum to others. So that you are not stuck with high interest rate loans for a long period of time.
You could also take out a personal loan against your debts. Normally I would not recommend taking a loan against a debt, but in some cases, it is the smarter choice. Personal loans usually have a lower interest rate. So instead of paying the high interest rate on your credit card debt, pay it off using a personal loan.
#7: Not using the extra money to pay off debts:
I know having extra money at hand can be quite exciting. And while I do not recommend living extremely frugally to pay off your debt, sometimes you need to be more cautious.
Having extra money in a month shouldn’t automatically mean more money to spend. You need to be more intentional about when you spend your money and for what. Weigh the choices you have and make a smart one. No, you do not need that designer handbag. Yes, you can do without that expensive manicure.
Ideally any extra money you make in a month should do towards paying off your debts, but it’s also nice to reward yourself every once in a while. Because if you have a lot of debt, you are going to be in this, for the long haul. And having this balance is really important, both for your pocket and your sanity.
#8: Not tracking your spending:
Ideally, if you are not tracking your spending, your budget cannot be successful.To have a budget that works for you, and helps you get closer to your financial goals, it’s important to know where you spend your money.
Because when you identify where your money goes, you can look at your expenses and analyse what expenses you can cut off. This will help you pay off your debts more quickly because the money that you save will go towards paying off your debt.
#9: Not discussing money with your partner/family:
You’d be surprised to know how many couples do not discuss money openly. In fact it’s one of the major reasons of divorce. For budgeting to be successful, both you and your partner need to be on the same page. If you set financial goals for the year, it’s important that you do it together as well.
And even if you don’t set goals, it’s still important to talk about money openly. You and your partner should both have a clear idea of how much the two of make and how much you spend as a couple. You will never be able tp pay off your debts, if one of you keep spending recklessly. Especially if you have a joint account.
I know talking about money is not always easy but it improves communication and is good for your relationship as well.
#10: Borrowing from your savings/ 401(K)
We are all guilty of this one. Because it seems so easy to take out money from your savings or retirement fund to pay off your debt.
But wait. DON’T.
I know it’s tempting. But unless it absolutely comes to it, don’t dig into your savings. It takes a long time to build your retirement fund and eating into your savings essentially means depriving yourself in the future.
You do not deserve that. You can hustle right now and not have to worry about it later. Moreover, you will have to pay an early withdrawal penalty as well as income tax. So think about it
#11: NOt knowing when to say No:
If you are in debt, and are still spending your money doing things because all your friends were doing something, it’s time to get a grip on. Just because your friends want to do things that cost money, doesn’t mean you have to do that as well. But I am not saying deprive yourself of anything that’s fun.
Set apart some money for things like these but make sure to stick to the budget. When this money runs out, understand that you will have to say no.
Let’s look back:
- Not Making a Budget
- Adding more to the debt
- Not having an emergency fund
- not having a side hustle
- Keep paying minimum
- Keeping high interest rates
- Not using extra money towards paying off debt
- Not tracking your spending
- Not discussing money with your partner
- Borrowing from your savings/ 401(K)
- Not Knowing when to say No