5 blunders to avoid when paying off your debt
Posted July 2017 by Melissa Abraham-Smith
Paying off debt is difficult. There's the high interest rates, regular repayments, and more than a little stress involved. But what would you say if we told you that you could actually be making the process more difficult for yourself than it needs to be?
Earlier this month, we talked about how something as simple as applying to a lender for money can be a challenge, and paying off your debts is no different: there are numerous hurdles in this journey just waiting to trip you up. What's worse? Many of them are easy to avoid if you know what to look for.
If you find that you've got two left feet when it comes to paying off your debts, then you're in luck. Today we're helping you make that debt-free dream a reality by highlighting the most common blunders people make when paying off their debts, and how you can avoid them.
Before we get to the how, let's take a look at the why...
1. You turn a blind eye
Debt can be a harsh reality to face, which is why so many Kiwis just like you often ignore it instead. Pretending your debt doesn't exist may make you feel better in the short term, but ‘what I can’t see can’t hurt me’ isn’t an effective financial strategy in any expert's playbook.
Delaying the inevitable just makes for many a sleepless night, and ensures you'll be facing an even bigger task when you're finally forced to sit up and take notice. As much as you might like it to, debt doesn't simply disappear.
By facing your fears - on in this case, your debts - head-on, you’ll find they’re nowhere near as scary as you first imagined. In fact, knowing the exact figures can give you a newfound sense of control over your finances.
So stop putting it off, and get your documents together. Calculate how much you owe, and put an end to those restless nights. From here, you can start to create a plan to wipe those debts out for good, which leads us nicely to…
2. You don’t have a plan
People didn’t make it to the moon on a whim, and you won’t defeat your debts by just throwing money at the problem until it goes away.
Instead? You need a plan!
Sitting down and creating a structured, detailed plan full of actionable steps will allow you to measure your progress, incentivise the process, and give you a chance to pat yourself on the back when you reach significant milestones.
The benefits of a plan don't end there. You'll also be able to calculate just how you're going to make your payments. Should you dip into your savings or investments? Do you need to increase your hours or make a little extra on the sides? Or would a loan for consolidating your debts make more sense? A debt repayment plan will help you answer all these questions and many more.
When putting this plan together, you should include information like:
- A complete list of your individual debts, as well as a running total
- The minimum payments, and when they're due
- The interest rates
With this information, you can then prioritise your payments to ensure you’re focussing on the debts that will save you the most money. Which will help you avoid this next issue...
3. You pay off the wrong debts
There's a big difference between making repayments, and doing so in an effective, efficient way that can save you time, money, and a whole lot of stress. This is why an effective debt payoff plan is invaluable. With it, you can target the debts that are most important.
One effective strategy is the Debt Snowball method, which sees you attacking your smallest debts first, while making minimum payments on the others. The idea here is that once you’ve paid off the small debt, you then roll those payments into the next-smallest debt, creating the "snowball" effect.
Targeting your smaller debts first will also help keep you motivated. Paying off a larger debt over the course of two, three, or even five years can be disheartening. But watching a smaller debt quickly disappear lets you know that yes, this is possible!
4. You keep adding to your debts
Paying off your debts is one thing, but continuing to flash the plastic and rack up more debt is a fast way to keep yourself in the financial limbo that is a life weighed down by debt. At the end of the day? You’re just undoing all of your hard work.
If you’re serious about paying off your debts, then you need to cut out any superfluous spending and cut up your cards. Maybe hold off on financing that new car that you don’t really need just yet? Or perhaps put those travel plans on ice?
By focussing all your efforts - and finances - on paying off your debts, you'll move one step closer to living your best financial life.
5. You don’t automate the process
Sticking to any new routine can be difficult. It's all too easy to forget or, worse, talk yourself out of something. See: the gym, New Year’s resolutions, or that catch-up with friends on a Friday night when staying in and watching Netflix feels that much more inviting.
Tackling your debt is no different. Sure, “I’ll pay extra next week!” may sound fine now, but it’s not going to get you any closer to being debt-free. And once you've skipped one payment, it's a slippery slope that's all too easy to fall down.
To make this process easier, you should take advantage of the technology at your fingertips and set up automatic bill payments via your financial institution of choice. Not only will this save you from accidentally missing a payment, but you'll save time and money too. It'll also show that you're financially reliable, which is likely to improve your credit score!
Defeating your debt is easy when you know-how
Debt may be scary, but paying off those debts doesn’t have to be. Like most things in life, you’re going to make mistakes along the way. But with the common hurdles we’ve explored today forefront in your mind, the journey should be that much easier.
So long as you face up to your debts, set up a plan - and automatic payments - and then avoid the temptation to spend, you’ll be well on your way to living a life without debt hanging over your head and raining on your parade. This is your life, and it’s time to start living it!