Becoming aware of your indebtedness and being firmly committed to breaking free of the debt trap is the first step to putting an end to this situation. But you still need to implement a coherent and effective action plan to get out of this downward spiral. Here are 5 mistakes to avoid when paying off your debt.
Not setting a budget
Putting your income and expenses down in black and white has several virtues:
- This already lets you take stock of the balances due and look the situation in the face by identifying all the accumulated debts.
- Starting from a budget developed in this way, you can also analyze the causes of the problem and look for solutions, especially sorting out the essential expenses and the unnecessary expenses.
- With a budget, there’s no more driving by feel: you stick to what is budgeted, taking care to remain below the bar of 30% indebtedness.
Of course, the budget must be realistic so that it can be followed. If it’s not sustainable, you may find yourself having to borrow to pay for essential expenses, such as groceries or energy bills.
Taking out new loans
If on one hand, you’re paying off your debt, and on the other, you keep taking out loans, buying on credit, and using your credit cards, you’re not putting yourself in a position to get out of debt.
You should therefore reserve the use of credit cards and the reliance on loans for emergency situations and refrain from paying for anything else with credit.
Paying the minimum amounts
It’s always possible to pay the minimum amount indicated on your credit card statement each month. However, by doing so, you’re more or less only paying the interest and very little of the principal. And it could take you several years to repay a debt of a few thousand dollars even if you no longer use your cards to pay for purchases on credit. It’s therefore essential to pay amounts greater than the bare minimum each month while setting a realistic amount.
Drawing on your emergency fund
Certain well-meaning people allocate their emergency fund to repay their debt. This is a mistake, because if the slightest problem occurs, they are obliged to rely on credit once again to cover the unexpected costs. Nobody is immune from having to repair a car that breaks down or unpaid health expenses.
Repaying the small debts first
It’s mistakenly believed that it’s preferable to pay off your small debts first before tackling the larger ones. However, those with the highest interest rates, such as credit cards, should be paid off first. By even partially paying off the debts that generate the most interest, you’ll reduce the interest on your loans as much as possible and get yourself out of debt faster.
Besides the desire to put an end to an uncomfortable situation, getting rid of your debt requires consideration and discipline. By setting a realistic budget, refraining from taking out new loans, and paying off as much as possible each month, you can get yourself out of debt and regain control of your financial situation.