Getting out of debt is not an easy journey. It takes time, discipline, and sacrifice to successfully do it. For one, it takes a significant change in financial lifestyle and spending habits if you are determined to get out of debt.
This means cutting back on eating out, buying new gadgets and jewellery, and taking vacations — all made more difficult to do by targeted ads everywhere, any time of the day.
While it is undoubtedly one of the most daunting tasks you’d have to do in your life, getting out of debt is possible, provided that you are committed and serious about this life-changing decision.
However, just like any endeavour, you are bound to make mistakes. Here are some you would want to avoid to keep yourself on track in overcoming this financial challenge.
Mistake #1: Setting an unrealistic budget
After committing to paying off your debt, possibly within a timeframe you have set for yourself, you set a monthly budget to work around with now that you are putting aside cash for debt payments.
Do not make the mistake of setting an impractical and unrealistic budget to make room to pay for debts. Make sure to take into account all your financial needs such as groceries, housing, utilities, insurance, retirement, emergency fund, and other important parts of your budget.
Make sure that the new budget is not too far away from the one you’ve been following for years. Ease your way into it and evaluate if you can set aside a few more bucks for debt payments in the next months.
Mistake #2: Doing the old spending habits
Since you are working around a new budget, you will need to adjust your spending habits. Start with the little things such as drinking coffee and eating breakfast at home and preparing packed lunches every day.
If you shop for new clothes every week, try to limit it to once every month if you can. You might have to remove your browser bookmarks for online shops for now to avoid the temptation.
Mistake #3: Cutting into your emergency fund and retirement savings
Do not stop allotting money for your emergency fund. With or without debt, you need three to six months worth of monthly expenses for emergencies.
Also, continue contributing 5 to 10 per cent of your monthly salary to your retirement fund. When it comes to retirement savings, time is your powerful tool, so putting it off or stopping can hurt your retirement years.
Mistake #4: Paying off all debts at the same time
It’s possible that you have more than one source of debt — may it be credit cards, mortgage, or student loans. It would help if you prioritize paying off the debt that incurs the highest interest.
Religiously stick to your budget and pay off your debts one by one, starting with one that has the highest interest.
Mistake #5: Doing it alone
It’s understandable if you do not find seeking the advice of relatives and friends regarding your finances a good idea. The good news is you don’t have to.
There are nonprofit organizations you can get free help from. Credit counsellors from these agencies can provide suggestions on debt settlement and management, credit consolidation, and debt-relief programs.