Tips to Avoid Common Debt Reduction Mistakes
Here are some helpful tips that could help you avoid making common mistakes while trying to reduce your debt.
1) STAY FOCUSED. Focus on one debt or one type of debt at a time. If you try to reduce all of your debt at once it can be overwhelming and very discouraging. You’ll be more successful if you focus on one debt or one type of debt at a time. Once you’ve eliminated the first one, you can move on to #2, etc…. Of course, you’ll have to pay the minimums on the others as you pay down each priority, but this strategy will work better than trying to pay a dollar or two more than the minimums on every creditor.
2) DON’T CANCEL CARDS WITH BALANCES. Obviously when you are trying to pay down debt, don’t use your credit cards. However, you should wait to cancel cards until after you’ve paid them off. You’ll want to take this approach because if you close the account while there is still a balance, this removes leverage with the credit card company. You will no longer be a customer so they will no longer have any incentive to make your life easier. Of course, they have little incentive even if you’re a customer, but they will have absolutely no incentive if you close your account.
3) HAVE REALISTIC EXPECTATIONS. Don’t try to build your debt reduction plan around unrealistic expectations. You’ll just get frustrated and give up. If you’ve never tried to live on a budget, don’t expect that you’re going to be perfect in the first month or two. Changing behaviors is a process that rarely happens overnight.
4) ESTABLISH AN EMERGENCY FUND. As difficult as it may seem, you must make an emergency fund a priority. It can be small, $1000 for instance. But, it’s very important there be one. When you are trying to get out of debt you may be tempted to empty out all savings accounts and apply the money toward your debt. Avoid this temptation. You want to maintain an emergency fund in order to pay for unexpected expenses. Without the emergency fund, you end up borrowing to pay these expenses and you’ll find yourself going backward. You may have to delay your debt reduction plan and only pay minimums for a few months while you rebuild the emergency fund, but it’s important to build and maintain this fund.
5) STICK TO YOUR PLAN. Don’t let other people dissuade you from your plan. There are different plans. Some people like to pay off their lowest balance cards first, then work their way from the lowest to the highest balances. Some people prefer to adopt a strategy where they pay the highest interest rate debt first and work their way down to the lowest interest rate. Whatever the strategy you decide works best for you, stick to it! You know yourself better than anyone else. Of course, listening to financial advisors and gathering information is smart, but you have to be true to yourself and you have to apply the advice that you know you can use. Reread #3!
6) RESTRICT ACCESS TO YOUR CHECKING AND SAVINGS ACCOUNT. Don’t be tempted to give your bank account information to a credit card company to automatically debit payments. You can certainly use your bank’s online banking system to pay bills, or you can send a check, but you would be well advised not to set up automatic payments with the credit card companies.
7) DON’T BE TEMPTED BY A SECOND MORTGAGE OR HOME EQUITY LINE OF CREDIT. Remember, a good debt reduction plan requires changing your behavior. Using a second mortage or HELOC to pay off credit card debts doesn’t help give you discipline to change your behavior. Usually what happens is that you end up with more mortgage debt AND new credit card debt. Why risk your house to pay credit card debts?
8) AVOID MAJOR PURCHASES. Try not to make any major purchases while you are trying to get out of debt. This may seem like common sense, but reminders don’t hurt. Sure, you may be forced into a major purchase if the washing machine dies, or the fence falls over. But, don’t be tempted after paying off goal #1 and goal #2 and start seeing some light at the end of the tunnel to run out and buy that new television you’ve been eyeing. Wait until you’ve completed your debt reduction plan first! Think of it as being a reward at the end of the process. You may even decide you don’t need or want that television after all once you’re done with your debt reduction plan.
9) DON’T ARGUE ABOUT MONEY WITH LOVED ONES. Again, reread #3. Maybe your spouse won’t be as disciplined about the plan as you. But, you shouldn’t criticize purchases your spouse makes because you wouldn’t have made the same purchases. It’s more important for each of you to love and support each other, not fight with each other.
10) NEVER THINK YOU ARE STUCK. I often hear people who think they can’t do anything about changing their jobs, their health, their financial situations, or their futures. But, you can. It’s up to you. If you want a better life, you have to choose a better life and choose to do things to make your life better. If you start feeling frustrated or hopeless, wake up! There is a better life out there, you just have to make it! Stop blaming yourself or others for your problems. Get up, get out there and just do it. Join a church, join a support group, write a resume, make a plan and execute your plan!
