Clearing debt can be one of the most stressful things you ever do. The relentless pressure to pay extra on debts while still managing the regular payments of everyday life can feel overwhelming.
Whilst the journey can be challenging as you make changes and put in place new strategies, the result is pure joy.
But have you ever wondered whether you are paying off your debts the right way? Yes, you read it correctly; there are ways to pay off debts which are more effective, and other ways that could leave you struggling to make real progress for years.
Once you know what to look for you can avoid the traps and make a breakthrough in clearing your debt. Here are the five most common errors made when trying to pay off debts.
1. No plan of action
A plan of action and maintaining a budget is very important when paying off debts. Without a written budget, you will have no real idea where your money is going and how much you can prioritise for extra debt repayments.
Many believe that budgeting sucks the fun out of life, but having a balanced budget puts you in control and gives you the freedom to decide. Strange as it sounds, once you begin to make progress and clear one debt after the next, you will get excited by planning and counting down the days until your debt is gone forever.
Running a proper budget while paying off your debts ensures you can still have the necessities without digging yourself deeper into debt each month. Remember you set the budget, so if you want to make a purchase that isn’t on there, it’s a clear signal to stop – the purchase will not help you reach your debt clearance goals.
2. Expecting to make more money
One of the generalisations (excuses) we hear from people who want to pay down debts but are struggling, is that they don’t make enough money. They imagine they will start once that promotion gets confirmed, or when they get that raise. If you keep avoiding making serious progress on clearing debts because you “don’t have enough income”, you will not achieve those goals.
Every extra amount you pay off adds up quickly. If the raise you deserve comes through then great, throw that at the debt too, but don’t sit back waiting for it to happen. Always remember, there is no time like the present, so act today.
3. Spreading your extra payments across all your debts
If you have ten separate debts, there is no benefit in targeting them all at once. You won’t feel like you are making progress, and this can lead to a loss of motivation.
Instead, list all debts from smallest to largest (regardless of the interest rate), pay the minimum payment on all of them and ATTACK the smallest debt with all your extra payments. This is called the Debt Snowball approach and it works for an important reason. We’re not solving a math problem here but a behavioural one. The Debt Snowball allows you to rapidly see and feel your progress, leading to increasing levels of motivation to get this debt out of your life.
4. Not being committed
Paying off debts, particularly large amounts, is not for the faint of heart. Sticking to your plans and your goals demand discipline and dedication every day. Remember you have started this journey because you want debt out of your life for good. You can certainly wander into debt; but you cannot wander out – it requires laser focus. The great news – you’ve got a plan of attack and you can do this!
5. Still Using Credit Cards
Really? This is like that nightmare when you are trying to run away from something scary, but your legs are like lead and you cannot move. When you are trying to decrease your debt, you need to stop acquiring new debt – period. Some people try to keep using their credit cards, while trying to pay off their current debt along with any new charges. This doesn’t work and will lead to the accumulation of even more debt.
Remember, it isn’t just important to pay off debt; it’s also important that you understand how and why you got into debt in the first place. If you don’t take the time to learn the root causes of your debt problems, you will likely end up struggling with debt again in the future.
Debt is a heavy load so don’t be held back when you can live debt free. Would you like help?
