Ask around and people will tell you paying off debts is a difficult and complicated process. Reaching an agreement to pay off debts is therefore a great step. Starting to pay is even a greater step. But have you ever stopped and wondered whether you are paying off your debts in the right way? There are a lot of decisions to make when in the process of paying off debts and hence its stressful nature because it does not only involve paying down your credit but also involves changing your spending habits, learning how to budget and then doing it correctly, setting aside an emergency fund, knowing who you owe and by how much and even prioritizing your debts. So it is a process and you cannot do it overnight. It is also a major life step and hence you need to make less mistakes. So here are some of the mistakes you should not make in the process of paying off your debts;
Mistake 1: Not having a debt pay off plan
A commom mistake that people who want to get out of debt tend to make is not having a plan to get out of their debt situation. You need a plan to get out of any situation; getting out of debt included. You need to lay down strategies on how you are going to do this step by step. Ask yourself the following questions when creating your plan:
- After how long do you hope to get out of your debt situation?
- Which debts do you want to pay off first?
- How much money do you want to channel towards your debt payment?
- How much money do you owe?
- Who do you owe?
- Which debts do you want to pay off early?
- Who do you want to help you in paying off these debts? Friends? Relatives? Because you need all the help you can get in the process of paying off your debt and hence the need for those question. Do not try to do it alone if you can get help. Try getting help from friends, relatives, experts and even websites.
Mistake 2: Trying to do it all at once
Maybe you have decided to channel $200 of yout pay towards paying off your debts and you have say 10 debt sources that you need to pay off. Paying $20 dollars on each every time you get a paycheck is a bad idea. Why? Because;
- It will be difficult to monitor your debts payment progress this way
- Since it will be difficult to monitor your progress you will be discouraged and start thinking otherwise.
In many cases many people tend to find themselves with more than one debt to pay; say credit cards, mortgage, student loans and they would start thinking that spreading their money towards the payment of these many debts is a good idea while it isn’t. Don’t try to pay off all your debts at once. Instead it is advisable to start with the ones with high interest first going down in that order. If you had a good plan this mistake will not be there anyway.
Mistake 3: Continuing with your same old spending habits
To succeed in paying off your debts completely you need to effect some changes to your habits. Look for some habits you need to do away with so that you can pump extra cash towards debt payment. Look for some items that you can do without. Cut on costs so that you have more cash.
Mistake 4: Not having a budget
If you don’t have a budget you will always find yourself getting deeper into debt. That is because budgetting gives you control of your finances and not having a budget means not having control of your finances. Make a budget on how you plan to use your money while in the process of paying of a debt. This way you will be able to use your money effectively while still paying off your debt.
Mistake 5: Not prioritizing your debts
Paying off your debts randomly may prove to be dangerous in the long run and hence need to prioritize them. You need to have a list on what debts you intend to pay up first before the others. Like paying off debts with high interest rates first then going down in that order. This may also make it easy to monitor your debt payment.
Mistake 6: Not setting aside an emergency fund
Trust me nothing discourages somebody more than slowing down your debt payment plan because your car broke down, or you have some urgent medical condition or something of that kind. Because in such a situation you have to beat the disappointment of having to use your funds in financing something you did not plan for other than channeling it towards paying your debt. Avoid this mistake by setting aside an emergency fund so that once an emergency arises you are able to fund it while also paying your debt.
Mistake 7: Not having an end goal
To pay your debt successfully you need all the motivation you can get because it is one of the hardest thing to do and having an end goal of paying off your debt will give you the boost you need. Have a reason why you need to pay your debts and work towards them.
Mistake 8: Closing accounts once they are paid off
Paying off debts is a good feeling and once you are done you may think this is a chapter you need to close completely and you may think closing an account once you are done is one of the steps you need to take in closing this debt chapter. However, this may be a bad idea as it may come back to cost you. Your credit score is often affected by the length of you credit history and canceling your account often affects your score. Instead of closing accounts you should consider other equally effective options like keeping your card away in a safe place and resisting any urge to use them. This way you will not get deeper into debt and on top of that your credit score will not be affected since they will still be active.
Mistake 9: Continuing to get deeper into debt
This may actually get you into more debts. When you find yourself using your credit card more often while you are in the process of paying off your debt you need to sit down and ask yourself ; what is the importance of paying off your debt when you are actually getting into more debts? Because when you do this monitoring your debt payment progress will not be an easy task. So you need to stop making this mistake and resist the urge of getting more debts once you start paying off.
Mistake 10: Not tracking your progress
When you started the process of paying off your debts you had a plan and a goal. For this you need to know where you are in the drive towards achieving your goal. Track your progress. Ask yourself whether you are on the right track towards your goal.