5 Mistakes to Avoid When Paying Off Debt
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What are Common Mistakes to Avoid When Paying Off Debt?
Getting rid of debt can empower your finances, and it’s often a key to getting ahead financially. But on this journey to debt-free living, you might make a few mistakes along the way.
So whether you’re trying to pay off credit cards, a student loan, a personal loan, or other balances, here’s a look at five mistakes you should avoid when paying off debt.
1. Forgetting to budget
Budgeting guides your money so that you’re spending a reasonable amount in your “needs” and “wants” categories, which then frees up cash for saving.
But budgeting isn’t only beneficial when you’re trying to save money. You also need a budget when paying off debt.
Some people make the mistake of forgetting to review their budget when devising a debt payoff plan. But the truth is, if you don’t have a budget, you don’t really know how much you have available for debt repayment each month.
When paying off debt, the first thing some people do is double their minimum payments. But while this helps pay down balances faster—especially credit card debt—you might be able to do more.
A review of your budget might reveal enough disposable income to triple or quadruple your minimum payments, allowing you to pay off a debt even faster.
2. No (small) emergency fund
The million dollar question when it comes to paying off debt is: Should I pay off debt first, or save first? And to be completely honest, there’s no wrong or right answer. Opinions vary among some financial experts, too.
If you want my opinion, though, I firmly believe in saving “something” before paying off debt.
I’m not suggesting putting off debt repayment until you have a 3 or 6-month emergency fund. But you should save something before you start tackling debt, whether it’s $1,000 or $2,000.
And the reason is simple. Unexpected expenses are going to happen. It’s not a question of if, but rather when. The purpose of a savings account is to prepare for these expenses.
However, if you prioritize paying off debt—and you don’t save anything—it only takes one emergency to push you deeper into debt.
If you don’t have enough cash to handle an emergency, you might use a credit card, and then carry this balance for several months. As a result, you end up paying more in interest.
So my advice, build up a small emergency fund first, and then prioritize debt repayment.
3. Waiting to earn more money
Another mistake some people make when paying off debt is postponing debt repayment until their income increases.
Yes, the more money you make, the easier it’ll probably be to pay off debt. But think about it from this standpoint: If you wait until you earn more to start paying off debt, you could end up paying hundreds more in interest.
So instead of saying, “I don’t earn enough to get out of debt.” Change the script and ask yourself, what can I do to generate extra money to pay off debt?
Now obviously, everyone has different circumstances. However, a lot of people are in a position to reduce or cut expenses from their budget, which they can then allocate toward debt repayment.
If you’re able to save $25 a week, that’s $1,300 a year that can go toward paying off a debt. Maybe you can reduce your weekly food bill by $25. Or reduce it by $15, and save the other $10 elsewhere.
Bottom line: Even if you can’t afford to pay a lot extra toward debt, paying a little extra is better than nothing. It can make a big difference in the long run.
4. Never negotiating credit card rates
Another common debt repayment mistake is failing to negotiate your credit card interest rates.
When you’re paying a high rate, it becomes harder to put a dent in high credit card balances. One way to chip away at the balance faster is to call your credit card company and ask for a better rate.
This works because you end up owing less in interest, so more of your monthly payment goes toward reducing the principal balance. In which case, you’ll benefit more by making higher payments.
To be clear, asking for a lower rate doesn’t guarantee getting one. Every credit card company has its own criteria for granting a rate reduction. Even so, there’s no harm in asking.
5. Lack of a debt payoff plan
It’s also important to come up with a debt payment strategy. In other words, will you use the snowball method, the avalanche method, or a hybrid of both?
These are two common approaches to debt repayment.
The snowball method—which is my favorite—involves prioritizing paying off the debt with the smallest balance first, while making minimum payments on your other debts. The smallest balance is the easiest to pay off. Eliminating this debt is a small win that motivates you to keep going.
The avalanche method, on the other hand, involves prioritizing the debt with the highest rate, regardless of the balance. This approach is also effective because you’ll save money on interest.
At the end of the day, the important thing is that you’re tackling your debt. Everyone has their favorite method, so you have to decide which approach works best for you. The point, though, is to have a strategy in mind. This gives you direction and keeps you focused.