This post is sponsored by Lexington Law, thank you for supporting brands who support TCM. As always, all thoughts, opinions, experiences, and advice are my own.
Last month I shared the 7 Habits Of Debt Free People, which you guys loved!! After talking to some of you, I realized that knowing the habits of debt free people simply isn't enough. The reality is, we ALL make mistakes when it comes to our finances. Most people have had to focus on paying off debt at some point in their lives. Getting out of debt takes time, a debt repayment strategy, and awareness. Today, I wanted to help bring some awareness to some of the most common mistakes people make when paying off debt. I hope these help you in your debt repayment journey!
12 Mistakes People Make When Paying Off Debt
Ignoring where it started
Yes, paying off your debt is priority number one right now, but not getting back into debt should be priority #2! Debt-nial is a real problem folks! You need to figure out where the problem started in order to not repeat history. So whether it was an unexpected job loss or mindlessly spending, take a look at where things broke down. Ask yourself what you can do differently to avoid the situation in the future. Feel free to ask others for feedback, or even drop it in the comments of this post explaining your situation, if you feel like there's nothing you could've done differently to avoid racking up debt – because trust me, there's always something we can be doing differently.
Not having an emergency fund
Too often, people jump into paying off their debt only to get hit with an unexpected expense that derails their progress on paying off debt. Which can lead to a massive backslide on all the progress they've made. In fact, according to a study, 69 percent of Americans have less than $1,000 in an emergency. Another brief, found that the median cost of “financial shock” for the year was $2,000. Before you start paying off debt, you want to stack at least $1,000 in an emergency fund. This may sound counter-intuitive, but trust me, you'll be grateful for it if an emergency comes up. The idea here is to not lose steam on your progress – or rack up new debt – once you do start paying off debt. Read more tips on how to save for emergencies from Lexington Law here.
You don't have a plan for your money
If you keep going about your life, and just plan on applying whatever is left over at the end of the month towards your debt, you'll quickly realize this isn't going to get you anywhere. Instead consider these two debt repayment strategy. Figure out which one works for you and implement it. Determine which debts you'll tackle first and how you're going to stop racking up new debt each month.
Borrowing from your retirement
As tempting as it may be to pull money from your retirement account to clear out your debt quickly, use it only as a last resort option according to Lexington Law. This is going to cost you so much more in the long run. When you pull money from a retirement account early, you'll have to pay a penalty fee. On top of that, you're lowering the amount of interest that can compound in the account, which is the entire point of saving for retirement early. In this article from Lexington Law, they share factors to evaluate before borrowing from your retirement account.
Yes, I know I just told you to wait until you have an emergency fund before you start paying off debt, but that's all you should be waiting for! You can't wait until you get the raise, or until the birthday money rolls in to start tackling your debt! You have to start now. It needs to become part of your lifestyle. If you keep telling yourself tomorrow and haven't addressed the other things on this list, tomorrow will never come and when you do get the raise or bonus, your lifestyle will likely just increase with it. Which leads me to…
Not knowing your why
Motivation has a half life. We forget what we're working towards and need a kick in the butt every now and then so we don't backslide into old habits. Figure out WHY you want to pay off your debt. Get angry at your debt. Curse it out and swear you never want to see it's face ever again! Dream about the new house. Dream about feeling guilt free when you order extra guac. Dream yourself into taking action towards a debt free life! Then create a visual reminder and put it somewhere you'll see every day to give you the extra motivation to stay on track.
Trying to pay off everything all at once
A willy nilly free-for all when paying off debt will not get you very far. You'll keep racking up interest, and ultimately increasing your debt. I can't stress the importance of choosing a debt repayment strategy first because there are ways that will cost you more money in the long run, and this is one of them.
Taking out a home loan to pay off credit card debt
While it may tempting to clear out your revolving debt in one quick shot, but resist the urge. Taking out debt to pay off debt, is still debt. And in this case, you're putting your house and credit score in double jeopardy since you're credit score is already hurting from your revolving debt, if you miss a mortgage payment, it'll take a double hit. It's a good idea to consult with a law firm like Lexington Law, who specializes in credit repair. They can help you understand your legal rights and options to get your debt under control and repair your credit.
Not specifying extra money is for the principle only
When you start paying more than the minimum balance, you need to specify the extra money is for the principle only. Most lenders will apply it to the interest payment first, which means you'll ultimately pay more in the long run.
You aren't automating
I read a study years ago that talked about how most Americans are living in financial chaos and that financial chaos leads to… you guessed it, DEBT! It's easy to get in debt, and stay in debt, if you are aren't clear on what's happening with your money, which often times leads to missing a payment. If you are one of those people who constantly racks in late fees, please do yourself a favor and automate your minimum payment on all of your accounts.
Closing out paid off credit cards
After having a credit card loom over you like a dark cloud for months (or even years), I get the temptation in wanting to close it and put that chapter behind you. But resist the urge! Stick with me here, most people are paying off debt for a few reasons: 1) to stop throwing money away on interest, 2) to increase their credit score, and 3) for a financial goal (house, baby, travel, etc.). So while closing out paid off debts won't directly impact your ability to pay off debt, it does impact your ability to achieve your “why” behind your debt repayment.
For instance, if you are trying to pay off your debt so you can prepare to buy your first home, you credit score is going to come up. Closing out that paid off credit card can negatively impact a couple of the factors that make up your credit score. Two of those factors include length of credit history and credit utilization ratio. So before you say bye-bye-bye to that credit card account you just finished paying off, consider how it will effect your length of credit history and credit utilization ratio.
[RELATED] What Is A Good Credit Score? & The 5 Factors That Make It Up!
Don't enlist support
We all need some support in life! Especially if you're the type of person who has a hard time saying no. You're going to want to tell your family and friends your paying off debt and ask for their support. Ask them to come over for pot luck dinners rather than meals out. Or to hold you accountable when you are out and tempted to spend. If you have a significant other, it's especially important you both are on the same page for paying off debt
Part of your debt repayment journey should also include a focus on healing your entire financial picture. Enlist support from the professionals at Lexington Law to help you on your credit repair journey. Like I said, there's no reason to live in debt-nial. There's no reason to not reach your financial goals. The professionals at Lexington Law have helped 10 million negative items get removed from their clients credit reports. Lexington Law Firm can help you if credit is bad, unfair, unsubstantiated, or inaccurate. They help their clients repair their credit and provide tools for monitoring your credit reports. Ask for help from professionals repair your credit score and financial situation so you don’t have to keep paying high interest rates. You can schedule your free credit repair consultation with the professionals at Lexington Law here.
How To Be Wealthy In Your 20s or 30s
12 Mistakes People Make When Paying Off Debt
- Ignoring where it started
- Not having an emergency fund
- You don't have a plan for your money
- Borrowing from your retirement
- Taking out a home loan to pay off credit card debt
- Trying to pay off everything all at once
- Not specifying extra money is for the principle only
- You're waiting
- Not knowing your why
- You aren't automating
- Closing out paid off credit cards
- Don't enlist support