If you landed on this page then you have probably been trying to pay off debt. This could be debt that you collected in college or debt that you accumulated over the years with home renovations, clothes, shoes, car loans and all the other consumer products out there. This post is to point out mistakes you should avoid when paying off debt.
Have you ever looked at your garage or storage unit and wondered what all those things were? You wonder why you bought them and meanwhile you have a huge credit card bill. I find that those are the hardest debts to payback.
When I finished paying off my credit card bills for things I didn’t remember buying ,I remember feeling remorseful and resentful. As painful as it was there are mistakes that I certainly could have avoided.
7 Mistakes You Should Avoid When Paying Off Debt:
1. Not following Dave Ramsey’s Snowball Effect
The first mistake you should avoid when paying off debt is not following Ramsey’s snowball effect. It’s so easy to bury your head in the sand and focus on a goal without getting help from people. Professionals who deal with the issues that we are facing everyday offer great tips. Dave Ramsey is a financial guru and his recommendation is to use the snowball effect when you are trying to payoff debt.
What’s the snowball effect?
The snowball effect is first taking debt and analyzing it. You then take the debt by amount and start paying off the smaller amounts. If you have a $1000 and $500 credit card debt for example, you focus on paying off as much as possible on the $500 debt while still making the minimum payments on the $1000 debt. When you finish paying the $500 off you take the payments you were making and pay the $1000 debt. It is the process of transferring payments to debt as you clear them.
Most people would finish paying off a debt and think that they now have extra spending money. However using Ramsey’s snowball effect you have extra money to pay off your other debts.
2. Charging credit cards for daily expenses
This is counterproductive and so common which is why it’s the second mistake you should avoid when paying off debt because when you are trying to pay off debt you shouldn’t be incurring more debt. For example I would pay off one credit card but I would have charged another card for meals, entertainment etc At the of the month I would have a higher bill than the card I had just paid off.
This meant that it took longer to pay off my debt because I didn’t change my over spending habits and I was still spending money that I didn’t own.
3. Not having a budget
It’s great to want to get out debt but if we aren’t aware of where our money goes then we cannot really achieve financial freedom. I made a decent amount of money so in my head as long as I had money in my checking account and I wasn’t overdrawn then I was good. Ever heard of living paycheck to paycheck? That was me in a nutshell.
I have since changed my ways by following this guide for my household budget. However it wasn’t an overnight change. It took months and years of discipline to finally create a budget that was functional and realistic.
The budget helped me to see which debts I paid and how much I had left. It also helped me to know when I had extra to pay even more towards the snowball strategy. Ramsey’s guide to financial freedom encourages us to get rid of all non-mortgage debt first.
4. I could have made more money to pay off my debt
Like most people it never occurred to me that I could make extra money off of things I already had in my house. Clothes that I only wore once to a wedding for example, old textbooks, novels, shoes, equipment I never used like blenders and juicers.
I could have sold these things on Amazon, Facebook, Ebay and made extra money to pay towards my debt. There are ways to make extra cash that should get you started on getting out of debt faster.
5. Not being as financially responsible as I should have been
When I started the journey to pay off my debt I thought I was doing great. I didn’t think I needed to make other adjustment in my finances. I was making the effort to get out of debt and I felt like I deserved a standing ovation! Boy was I wrong.
This set me months back if not years in my debt recovery. Eating out, going on expensive vacations, buying clothes I didn’t need, still on cable… the list is endless. I didn’t change my lifestyle so I was still living like a high roller which had landed me in this debt problem.
6. I did not have an emergency fund
Dave Ramsey recommends having an emergency fund of $1,000 even before you start paying off debt. Imagine having a life event occur and not having the money to pay for it. You could end up having to take on a high interest rate card to take care of the issue. This lands you in the same problem that you are trying to get out off.
7. Not taking advantage of interest free credit cards
Every now and again I get an offer to transfer my credit card balance to another credit card company. It is an interest free offer for a specified duration. This means that if I paid for a $5,000 vacation I can transfer that balance to the offered credit card. I can then pay the balance over 12 months – interest free.
This may be a little bit controversial for some people but to me this is an interest free loan. You must be a disciplined person to use this strategy. If you miss the payment deadline the interest is astronomical. However it provides an opportunity to pay off debt at a more comfortable pace.
It can get very frustrating and you will feel like you are going round in circles that are never ending. Don’t give up though. Self correct by paying off the minimum payments while setting up the emergency fund. You can start working on repairing your credit at anytime. It’s never too late!
I hope my mistakes can prevent you from going through the rabbit hole I found myself in. Is paying off debt easy? It’s not or everyone would be financially free. However it is doable. These are mistakes you should avoid when paying off debt to make the process more seamless.
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