Is Paying off debt part of your goals this year? If so, you are not alone! This post will give you 15 money mistakes to avoid paying off debt fast and avoiding new debt.
These personal finance tips will help you turn your finances around fast and keep healthy finances even after paying off debt.
Find out how avoiding these 15 money mistakes will help you stay away from debt and improve your finances fast.
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1. Poor Budgeting
Having a budget should be the first step in your plan to pay off debt. However, it is not enough. You also need to be able to stick to your budget. To do so, your budget needs to include all expenses you might have to face. These include :
- Medical and health care expenses,
- Debt pay off,
- Personal Spendings (clothing, home decorations etc.),
- and eventually Investing.
The biggest mistake people usually make is not including miscellaneous expenses in their budgets. This category is, however, an important category to avoid further debt.
Having a small amount of money dedicated to the miscellaneous category will allow you to face unexpected expenses. At the end of the month, if the funds allocated to this category have not been used, I usually wire them to my savings account or use them to pay more debt.
I consider that investing should be the last point of your budget because, in my opinion, Investing should not be a priority when you are trying to pay off debt.
Remember, you should only invest money you can afford to lose. So, you should only ask yourself one question: can you afford to lose any money when you are indebted?
2. No Emergency Fund
If you want to pay off debt as quickly as possible, you probably want to dedicate as much money as possible to pay off debt.
You might feel like you’re making massive progress by putting all your money into debt payments. This is true until something unexpected happens… And believe me, unexpected expenses will happen along your debt pay-off journey.
Although paying off debt should be one of your priorities, building an emergency fund is crucial to avoid additional debt.
Most people recommend having about 1000$ in this fund. This advice is based on Dave Ramsey’s baby steps. Nowadays, having 1000$ in an emergency fund is a bare minimum.
No matter how much you want to have in this fund, building it should be your priority to avoid accumulating additional debt. Having no emergency fund was one of my biggest money mistakes.
3. Having no plan
Are you throwing money at your debt without having a clear plan? If you are doing so, well, you are making a mistake.
Having a plan is just as important as a budget. Being debt-free is your destination, and your plan is your roadmap. You need to know exactly where you are going and when you will get there.
Knowing how long it will take you to be debt-free and having a precise date in mind will help you stay motivated.
4. Not sticking to a debt payoff method
This one is directly linked to the previous one. You need to have a plan, and choosing the debt payoff method you will use is part of this plan. The two main methods recommended are the snowball and avalanche methods.
The snowball method consists of sorting all your debts from the lowest to the highest, paying off the minimum payment on all balances except the smallest one.
You should put as much money as possible on the smallest balance until it is fully paid. Once it is, start again with the next debt and so on until you’re debt-free. This method is recommended if all of your debts have similar interest rates.
The avalanche method consists in sorting all of your debts starting with the highest interest rates. You should then pay the minimum payment on all your balances except on the one with the highest interest rate.
This one debt will be the one you want to pay as quickly as possible. You should put as much money as possible towards this debt to save money in interest.
Choosing a method is important to define how long it will take you to pay off debt and have a clear strategy.
5. Getting into new debt
This one is probably one of the worst money mistakes one can make while paying off debt. This is a mistake I was actually quite often guilty of.
If you want to get debt-free, you need to stop using those credit cards and start paying for things in cash. Leave your credit cards in a separate wallet at home. You will see, you won’t miss them!
6. Keeping high-interest rates
When my debt was at the highest – about 50k – I was paying 300$ per month in interest only. This is why, although the most recommended pay-off method is the snowball, in some cases, you should consider the avalanche method.
Another solution to avoid high-interest rates is to refinance your debt. This is actually what I did, and it made me save thousands!
I wish I had known about refinancing sooner! Refinancing your debt means replacing an existing debt with another debt with more favorable conditions (and lower interest rates).
Getting into new debt might seem counterproductive when trying to get out of debt, but this is an option you should definitely consider as it can make you save thousands in interest.
Paying high-interest rates is definitely one of the money mistakes you want to have at all costs.
7. Sticking to minimum payments
Minimum payments are the smallest amounts owed on a debt that you can pay before a due date without incurring penalties.
The minimum payment usually varies between 3 and 10% of the total amount owed. Paying only 3% of your debt, considering that every single month or day, interests will add up to the amount owed, is clearly not enough. You can imagine how long it will take you to pay off a debt at this pace.
This is why you should never stick to minimum payments. Minimum payments cost you less money monthly, but you will make little to no progress and will take forever to pay it off.
8. Not putting that little extra money towards debt or savings
Remember about the Miscellaneous category in your budget? You might end up the month without spending all the money allocated to it.
You should definitely put that money in your savings account or use it to pay off more debt. Using it to buy nice things can be very tempting. Yes, you deserve nice things, but you also deserve to be debt-free, so keep your goal in mind and use that money wisely.
9. Not using unexpected money to pay off debt
Yes, unexpected expenses happen quite often, but unexpected money is also a thing. Whenever you get a raise, a tax refund, or a bonus, use the money to pay off debt.
Increasing your lifestyle and expenses after getting a raise can be tempting. It is actually a thing called Lifestyle Inflation. This behavior is so common that the subject is included in all good economics books.
Lifestyle inflation is also why some people cannot save money despite making over 100k a year. This is a behavior you should definitely avoid. This is also part of the main money mistakes that got me into unnecessary debt.
10. Borrowing money from your 401k plan
Taking money from your 401k can be tempting when you are seriously indebted. In case you are considering this option, think about why you started saving in the first place. You did it to make your future self a favor. By taking money from this account, you will actually rob your future self. Yep.
In addition to that, you are not supposed to take any money out of the account before you turn 59. If you do so, you will have to pay penalties AND taxes on the amount you have withdrawn. This is definitely a bad idea.
11. Not changing your lifestyle
Many things can drive people into debt. It can be losing a job, divorce, or illness. In other cases, debt is simply the result of a series of bad decisions.
In all cases, the key to stopping debt is to spend less than you earn. This often involves a lifestyle change. Thinking that you can pay off your debts and continue to live the same lifestyle is a mistake. It is necessary to identify the causes that put you in debt and to change these behaviors.
Related read: 15 Lessons Rich Parents Teach Their Kids
12. Never talking about money at home
Talking about money is never easy. According to several studies, money is one of the main causes of divorce after infidelity. Actually, although people sometimes divorce for other reasons, 41% mentioned that financial incompatibility was a problem in their couple.
Still, talking about money and aligning your financial strategy with your partner will be key to getting out of debt. Paying off debt should be a common goal because it implies a lifestyle change.
13. Thinking that things could be worse
Yes, things can always get worse. Still, it is not a reason for not being mad at your debt. If you want to find the motivation to pay off debt as quickly as possible, you need to understand how bad debt is for you.
You need to be mad at your debt and yourself. You will then understand that every debt should be avoided, even if it is “only” 500$ on a credit card.
14. Not trying to increase your income
Whether you are indebted or not, you should always consider increasing your income. It is key to financial freedom and can really boost your debt payoff.
You can look for additional income streams or work more hours. Increasing your income while lowering your expenses will help you to destroy your debt. It will help you get debt-free much faster. You will then be able to enjoy a debt-free life!
15. Trying to keep up with others
Trying to keep up with others is never a good thing, which is also true when it comes to personal finance. Paying off debt is a very personal journey. Trying to keep up with others will slow you down in this process.
This doesn’t mean that you should never eat at a restaurant or have a drink with your friends, but you should include these expenses in your budget and stick to it. Sometimes, you just have to say “No!”.
These are the 15 mistakes that keep most people in debt. The good news is that anyone can get out of debt and have healthy finances. All it takes is a bit of financial education and a solid budget! Are you struggling with any of these mistakes?
If so, start improving your finances today with the free resources below!