Paying off debt and being debt-free is the dream we all have in our minds. It feels so good to be debt-free. With limited resources and a tight budget, it seems impossible. To eliminate massive debt, you will need a plan and determination to stick to that plan. Also, it is important to avoid mistakes while paying off debt.
Paying off debt is not easy. It takes planning and sticking to that plan for a long time. Doing it without any real plan will not give you the desired results.
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Mistakes to avoid while paying off debt
1. Not having an Emergency fund
Having an emergency fund will help you have a cushion. I know when we are trying to pay off debt, we want to get rid of it as early as possible. At this point, saving money for an emergency fund is totally overlooked.
Having even $500-1000 in savings gives you much-needed peace required while paying the debt.
Having an emergency fund for emergencies helps if some emergency arises on the way to paying a debt. You may have to deal with a broken car, home maintenance, medical issues. An emergency fund helps you to stay away from incurring more debt during these kind of situations.
What to do
Start an emergency fund today. Start with adding $50 a week. If you feel that you don’t get spare money, do these
- Cut your spending and buy only needed items
- Start doing surveys. You will have some money at the end of the month to add towards your emergency fund
- Stop buying your lunch every day and take your home-cooked lunch with you
- Cancel all subscriptions
- Lower your utility bills
2. Not automating your monthly instalments
This one is so important because you may forget to pay your monthly instalment which will further incur debt. Automation helps in paying the instalments without missing any payment.
Whenever you forget to pay your instalment, you accrue debt. Keep direct debits for your minimum payments to all debts and
What to do
- Automate your payments
- Keep money in your account which you use to pay instalments
3. Not having a paying plan
This is by far the most important step. Not having a plan is a recipe for disaster. Without a focused plan, it is highly that you may lose the momentum and motivation to stick to your debt repayments.
Paying minimums on all debts without a clear focus or trying to pay them all together, will not help you in the elimination of debt.
What to do
Pick any plan and stick to it. Dave Ramsey’s Snowball method is really good in terms of keeping the motivation to pay the debt. When you eliminate one debt, you feel accomplished and motivated to tackle the next debt with enthusiasm.
4. Not having a functional budget
Not planning for your future expenses and paying debt can backfire you. Don’t pay your debt without creating a budget. You may pay a big amount of debt on your credit card in excitement, and then you may not have left any money to pay the bills.
Create a budget with basic categories and don’t forget to allocate some amount for entertainment and fun. If you will leave this category, it is highly that you will overspend.
What to do
Take a pen or pencil, create a plan to allocate money to different categories. If you like digital budget planners, you can use those. It just depends on you how you want to have an actionable budget.
- Create a functional Budget
- Stick to the budget
5. Taking loans to pay debt
Sometimes people take more loans to pay the loans. Second mortgages, personal loans can get expensive and drain your disposable income. Their interest rates are always high which will make your situation worse.
This can keep you always in a position to be always broke.
6. Not having focused goals
Without having focused goals, it is difficult to eliminate the debt. Goals give a dimension to your tasks and daily lives. Debt is no different. If you want to stick to debt repayment, create goals.
SMART goals like how much do you want to pay in what time will help you keep the momentum. Without goals, you may lose motivation in between.
What to do
Create time-bound goals and accomplish them. If goals seem to be too big, break them into smaller financial goals.
7. Doing nothing to earn extra
If you think that paying debt with the money you earn will take longer to repay the loans, start earning a side income. There are many ways you can earn more every month.
Who knows, starting a side hustle may become your full-time business.
What to do
Start some side hustle and make money. Here are some of the ways to start earning a side income.
Make money from surveys
8. Still using Credit cards for shopping
Studies have shown that those who use credit cards to pay for their shopping are more likely to spend more. Also, they are more susceptible to impulse buying.
To avoid these two, take cash with you and purchase everything with cash. This way, you will have two advantages: No impulse buying and buying less.
When you have a credit card in hand, you are more likely to spend more without much thinking.
What to do
Keep your credit cards buried somewhere at the place not easily accessible. Start shopping for everything with cash. This will help you refrain from building up more debt.
9. Not paying extra money towards debt
Making only minimums will not help you eliminate the debt. To be totally free from debt, you have to make extra payments towards the debt. It is possible if you know which one you need to pay off first.
Whenever you get any bonus or a pay raise, put that extra money towards your debt. It is a normal instinct to spend your bonus or extra money you got to pamper yourself or upgrade your car or phone. This will lead to lifestyle inflation.
Increasing your expenses with your income will keep you in a similar situation for your whole life.
10. Keeping same spending habits
To pay the debt, changing your spending habits is crucial. If you are a great fan of buying a new car every 3-4 years, think about it. Or if you are obsessed with buying a new phone as soon as it is launched, you need to change.
To live a healthy life, you don’t need a ton of stuff. If your basic needs are met, you can survive well. It means living below your means is the real key.
11. Stop paying for expensive hobbies
If you love expensive hobbies like sports, recreational hobbies or any activity, think about changing it. There are many hobbies to take which are not very expensive.
Even we enrol our kids into expensive activities and sports. It is a good idea to pursue all the activities when you have money but when you are broke, refrain from expensive hobbies and activities so that you can become debt-free.
What to do
You can take those hobbies later. Pause those hobbies for the time being and pay the money towards the debt. Being debt-free is such a feeling that you will enjoy your hobbies better.
12. Not keeping the motivation
It is important to stay motivated on the journey to be debt-free. It will take some time depending on your situation. Stay motivated and be on the track.
For this, you can take some help or you can have accountability partners.
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