Changing financial habits can be really difficult. We all make mistakes along the way no matter who we are. It's especially tough when it comes to things we're not familiar with like paying off debt. If you've never done it or done it right before how do you know if you're paying off debt right? It can be confusing.
Here are 8 common mistakes I've seen people making when it comes to paying of debt. We've done more than a few of them ourselves.
No emergency fund
You read about how most people don't have enough money saved up to cover a $400 emergency. When we started our Financial Peace University journey I remember Dave talking about how baby step 1 (having a $1,000 emergency fund) wasn't there at first. After hearing so many stories about people having to start over because of an emergency that popped up and threw off the entire plan they came to the conclusion that most people could cover most emergencies with just a $1,000 emergency fund.For our debt journey we were able to pay it off without going that low in our emergency fund but for some people just saving up for the small emergency fund is a big step. Having a small emergency is super important so you don't loose that momentum if something comes up and you don't go into more debt for the emergency.
Not cutting all extra spending
Kevin and I had some fights about this step for sure. I was ready to cut all spending to the bone and he wasn't quite ready to go that hardcore right away. We ended up cutting tons of excess spending and are continually working to cut more still even though we're out of debt. If you're still spending money on things like coffee from Starbucks and dinner out each week are you really focusing on your debt? Nope not at all. To get out debt you need to be focused on it. If it's not a priority it's not going to be successful, that goes for anything in your life especially your debt and finances.Going into more debt
If you're already in debt why do you keep adding more debt to it? Credit card is almost maxed out? Well stop using it! Don't keep spending when you're in debt, it goes right along with cutting out extra spending. Have 35k in student loans and thinking about getting a masters and adding another 20k to the debt? That's just nuts. Don't do it. You don't need to keep going into more debt, you're just digging the hole even deeper.Not having a plan
A plan is super important when it comes to your debt. It's really easy to wander into debt. Kevin and I did that with our cars. We had no debt at all and decided we could just finance his car. Then mine was needing to be replaced so we just decided to finance mine to. There we were with no debt but then all of a sudden 30k back in debt! It still makes me so angry that we just wandered back into it.
To get out of that debt isn't as easy as getting into it. We needed a plan! Which involved budgeting, making sure we knew our finances better and what our goals were. If you have a partner it's really important that you're both working on the plan together!
Taking on more debt to pay off some debt
I've heard crazy stories about people just moving debt from one credit card to another or by taking out a home equity loan to pay of credit card debt. Why would you put your home into jeopardy with a home equity loan just to pay off consumer debt? Some people think that they can withdraw from their retirement accounts to pay off debt. That's another not so smart idea too. Don't do that. The penalties and interest can be devastating.Not tracking your progress
Working on something like paying off debt for a long time can be disheartening. Tracking your progress and celebrating milestones helps to keep you going for the long haul. Track that progress as you go. Make a huge thermometer and draw it in when you pay off certain amounts. Make a huge paper chain around your living room and rip off a circle every time.Don't just track be sure to acknowledge and celebrate milestones as well. Maybe you do something to celebrate each $5,000 you pay off like a dinner out (within budget of course!) or something special like pampered or a movie out. Or maybe it's splurging on the fancy cheese at the grocery store. Keep your moral up and acknowledge all your awesome work.
You're not paying extra towards the principle
This is especially important to pay attention to when it comes to paying off your mortgage. You want to make sure you're paying towards the principal and not just having the extra go towards the interest. Paying off the principle early will have you paying waaaay less in interest, which is the whole point! Make sure you pay attention to where those extra payments are going.You're not increasing your income
This can go hand in hand with cutting way back on your spending. You will give yourself a raise just by doing that. Don't just stop there though. Is there something that you could be doing to increase your income to help pay off that debt? Maybe it's something like Swagbucks where you're just earning a little more or Respondent where you can earn earn money for studies.Maybe you want to really wipe out that debt fast so you get a second job. Increasing your income can really put the pedal the metal. There are many different options, who knows maybe you'll find a great long term side hustle that will keep bringing in money once your done paying off debt.
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