6 Mistakes to Avoid When Paying Down Your Debt

by | Mar 16, 2015

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.

Mistake #4: Paying Off the Debt With the Highest Interest Rate First

Paying off the debt with the highest interest rate is a common mistake among those paying off debt. At first glance, it seems like a smart idea. Think of all the interest you will save! However, sometimes your largest debt balance is an account with the highest interest rate, commonly the situation with student loan debt. When trying to pay off the larger balances first, it can feel like you aren’t making any progress. This can be discouraging and depressing. To keep your momentum going, begin paying off your smallest debt first. Continue to make the minimum payments on all other debts, but apply all of your surplus to the smallest debt. You will be surprised at how quickly this small debt is paid off. Once that happens, you are now able to put your normal surplus plus the extra amount you were paying toward the smallest debt onto the next smallest debt. This is referred to as a “debt snowball” and is the quickest way to get out of debt. By using the debt snowball method, you will be debt free much quicker and the savings in interest will have been minimal.

Mistake #5: Cashing Out Your 401(k)

When you feel like you are swimming in debt, it can be tempting to cash out your 401(k) plan to speed up the pay-off timeline. This is a short-term fix with negative short-term and long-term consequences. You will experience immediate consequences from this decision, as taxes and penalties will be imposed for cashing out your 401(k) early. More importantly, you will experience the long-term consequence of tapping into your retirement savings. Retirement wealth builds tremendously over time, as your principle balance grows and interest is compounded. Time value of money calculations prove that substantial wealth can be built by saving even just a small amount, provided this amount is saved beginning at an early age. Cashing out your 401(k) reduces not only the principle balance, but years of compound interest growth. This option should be considered only as a last resort to avoid bankruptcy.

Mistake #6: Expecting Quick Results

Most likely, you did not get into debt overnight. Your debt grew over a number of years, whether it was the student loans you took out after high school to pay for college or from a few too many nights on the town over the years that your income just couldn’t support. Likewise, you should not expect to get out of debt overnight. This desire can lead to poor financial decisions that will have long-term consequences, such as the 401(k) example mentioned previously. While techniques such as debt consolidation might help you pay off your debt a little quicker, if the underlying behavior does not change, no progress will ultimately be made. There’s no time like the present to begin changing your behavior and tackling your debt.

Photo courtesy of frankieleon

24 Comments

  1. Gina

    Lots of great tips on how to pay off debts. Will definately plan and follow recommendations. Thanks for your support!

    Reply
  2. Jc Gouge

    Say, you got a nice blog.Really thank you! Great.

    Reply
  3. Carol

    Love this app. Do no change

    Reply
  4. ADE

    I just started my debt payoff and I am excited. Four years to go.

    Reply
  5. Nate

    I’m so ready to do this. I think this is the one that will make a difference.

    Reply
  6. Nellie

    This is a great app, look over it daily to give me courage , to expect my mistake and face a new day of being debt free. Start on Januray 1, 2016. , goal is to be debt free in 4 years & 6 mo.

    Reply
  7. MD0103

    Love this app!!!! 3 years to being debt free here I come!!! (Maybe sooner!)

    Reply
  8. Hate bills

    I love the idea of this app, but have run into one little issue. I paid off my second credit card a few weeks early and your app won’t adjust the interest accordingly. So, I have to go in and show that I’ve made another payment. Its not a huge issue, but I would like for it to be exact. I’m OCD when it comes to numbers.

    Reply
  9. Sheila

    So thankful I found this app. Getting started and doing my best to stay disciplined and focused. Excited to see the amounts go down. Long way to go but at least the journey has started. Thank you.

    Reply
  10. Amanda

    Love this app. It’s really helping me payoff my debt. Only change I would like to see is a place to add income. This way you get a better picture on how well you are doing with the changes of your life style.

    Reply
  11. Calvin Glover

    Great app looking forward to good results. Yes I’m ready to become debt free in six months.

    Reply
  12. Denise

    Hi, I am loving the app, however I am stumped on your ‘6 mistakes people make’ points on No.4.

    When you say a common mistake is people paying off the LOWEST interest rate first thinking that they will save loads in interest is wrong, do you mean people often want to pay off the HIGHEST interest rate first? I can’t see how you save anything paying the lowest off as everything else is mounting up?

    I am torn between paying the highest interest and saving myself around £250 by the time my debt is paid or paying off the smallest amounts first so the snowball really starts – I think like you say, the second option will give me a better feeling of achievement and encourage me to move on with the rest.

    Thanks though, a brilliant bit of software, I’m loving it.

    Reply
    • admin

      That was an oversight. It’s fixed now.

      Reply
  13. Anonymous

    Best app ever!

    Reply
  14. Debra

    So glad I found tbis app. It has really helped me stay on track. My debt had stayed tge same level for years, now I am making progress! 1 year 8 months to go to be debt free. Yay!

    Reply
  15. ELAINE G

    I also say that adding a place for income would be a great help. It would make tracking easier. I love being able to see a paid off date! Something to shoot for!

    Reply
  16. Dana

    I know you say dont cash out your 401k to pay off loans but what about taking a chunk out of savings? I have about $6000 worth of debt on 2 c.c. one at 4.5%interest the other at 13% interest. I only have $12000 worth of savings. What should i do?

    Reply
    • Susan

      Thats the easy way out. I also did that and end up in cc debt again. It didnt showed me discipline therefore I had to start all over again and now I’m half way there.

      Reply
    • Judy

      Dana – I would get rid of the high interest card…pay it off since you have the means to do so. $12,000 in savings? (Or was that a typo?) What interest rate are you getting on savings?You don’t specify what balance amount is on the higher rate card.

      Reply
    • Anonymous

      I would pay off both ccs right away with the savings.

      Reply
  17. Jules r

    Disipline, its like dieting, dont diet, change your lifestyle and stop spending money you dont have. The only times you should be in debt os a car, a home and unexpected medical emergency

    Reply
  18. Lisa

    Started a year ago, two car payments, personal loan, mortgages, credit cards, it stated I would be paid off in 15 years, a year into this and my payoff is now 10 years! Love the helpful hints, discussions, and support! So excited to be debt free in ten years or less!!!

    Reply
  19. Julie

    Love this app. I looked at many other debt payoff apps and this one is by far the best. I have the pro plan app.

    Reply
  20. Sammi

    Just getting started, excited to say the least, thanks for the app to help me do it clutter free…

    Reply

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Our team is dedicated to providing up-to-date financial information to help people manage their debt. Our goal is to improve mindset, reduce guilt, and deliver actionable information. We are not financial professionals and the information we've provide should not be considered official advice.