Are you saddled with student loan debt? Does your credit card debt keep growing? Getting out of debt, and staying out of debt, can be a very difficult process. Yet, it is one of the most important things you can do to set yourself on a strong financial foundation and begin to build wealth for the future. Because paying off debt can feel emotionally overwhelming, people sometimes make mistakes when they panic and can’t see a clear picture for how to climb out of the hole they are in. Below are a few important mistakes to avoid as you put yourself on the path to a healthier financial future.
Mistake #1: Failing to Make a Budget
The first mistake you can make is failing to make a budget. Preparing a budget is a critical step in assessing your financial situation. Are you so overwhelmed by your debt that you aren’t even sure of the total amount you owe? It’s time to face your fears and begin to get control of the situation. Start by listing each of your debts so that you can develop a plan to pay them off. Then, using this information, create a detailed budget. List all sources of monthly income and all monthly expenses that must be paid. This information will help you determine your strategy for attacking your debt.
Mistake #2: Continuing Your Current Lifestyle
It’s time to face a hard reality. You cannot continue your current lifestyle and become debt-free. Many times, living beyond our means is what gets us into a debt situation to begin with. Based on the budget you prepared, look to see what areas of your lifestyle need to be scaled back. Perhaps you have an affinity for designer clothing or enjoy dining out in restaurants frequently. Perhaps you drive a vehicle your salary cannot support, and have the high car loan that comes with it. When you are ready to get serious about paying off your debt, you must make sacrifices. It’s time to stop the shopping trips and begin cooking more meals at home. It’s time to sell that vehicle you can’t really afford and pay cash for an inexpensive vehicle that will allow you to save some money and really focus on getting out of debt.
Mistake #3: Neglecting Your Savings
When you are intensely focused on getting out of debt, it can be tempting to put all extra money towards the debt pay-off and neglect savings. However, establishing an emergency savings account will help you avoid going further into debt. Before you begin attacking your debt, put $1,000 in a savings account. This will allow you to respond to life’s inevitable emergencies without having to reach for the credit card. Once your debt is fully paid off, put all of that extra money that went toward debt repayment into building a more robust emergency savings of at least 3-6 months of expenses.
Next Up: Mistake #4: Paying Off the Debt With the Highest Interest Rate First