There are right ways and wrong ways to deal with debt. Granted, the anxiety, uncertainty and sheer irritation of struggling with financial obligations are reason enough to want to dispatch them as soon as possible. However, you have to be methodical about it, otherwise you could wind up with a whole new set of problems — in addition to your debts.
Here are six mistakes to avoid when paying off debt.
- Failing to Craft a Spending Plan
Going without a plan leaves you in a reactive position, rather than a proactive one. Implementing a strategy will enable you to direct your funds in the most efficient manner. You can also track your dollars and gauge your progress. In other words, a spending plan gives you metrics by which you can observe your success and feel good about your accomplishments.
- Focusing on the Wrong Debt First
Most people pay as much as they can toward each debt in an effort to satisfy them as soon as possible.
This could be a mistake.
A better method is to list your bills in order of balance owed and pay as much as you can toward the lowest balance, while making minimum payments on the higher balances. When the smallest one is done, combine the money you were putting toward it with the minimum payment you were making on the next smallest one and repeat the process until all of your obligations are paid.
Another approach it is to list them in the order of their interest rates from low to high. Then put as much money as possible toward the one with the highest rate until it is satisfied, then attacking the next highest one and so on.
Most people prefer the first one because you usually see progress sooner, which provides incentive to continue. However, it can be more costly, as you’ll pay more in interest charges. Ultimately, both approaches are effective. Pick the one that makes the most sense to you.
- Trying to Do it Alone
If you’re missing payments, can’t afford to make the minimums and have no idea what you’re going to do, it’s time to seek professional help. Working with a debt specialist like Freedom Debt Relief could help you find a way when there appears to be none. Going it alone in these circumstances could be catastrophic to your financial health. There’s no shame in getting help.
- Foregoing an Emergency Fund
The temptation to throw all of your resources at your debt can be great. The only problem is all of your gains could be erased by a single incident if something untoward comes up.
Living without an emergency fund is like driving a car without insurance. You might get away with it, but the one time you don’t will make you sorry you tried it.
Experts recommend having enough cash on hand to cover at least six months of your household expenses. This way, you can deal with them in cash rather than deepening your debt.
- Getting a Home Equity Loan
On the one hand, you can roll your high interest debts into a single low interest loan with manageable payments. However, the risk involved is considerable. You could lose your home if paying that loan becomes too difficult to do.
- Accumulating New Debt
So many people keep right on charging things even as they’re trying to render themselves debt-free. If you’re throwing huge sums of money at your debts each month, while still using a credit card or financing purchases, you’re swimming against the current. Eventually you’ll tire and be swept away.
These are six of the most common mistakes to avoid when paying off debt. Or, if you want to look at it in a more positive fashion, doing the opposite of what you see here is a smarter way to deal with debt.