Credit cards, mortgage, car loans, short-term loans etc. – we all shake hands with debt somewhere along the way. However, sometimes debt follows you around and you can’t seem to shake it off, and it becomes bigger and meaner than ever. So, how do we get out of debt, and prevent the debt monster from becoming unbearable?
Making the decision to get out of debt and being truly committed to the process, is a life-changer. Most of us want to get out of debt as quickly as possible. But we forget that it’s a long and slow process, it’s definitely worth the effort.
If you’re serious about making the change, you will have to think about money differently and ultimately change the way you use it. Because we’ll be experiencing a lot of change, we can expect a lot of mistakes.
Here are some mistakes you should try to avoid when fighting your way to financial freedom.
Mistake 1: No plan for freedom
One of the biggest mistakes that people make when trying to get rid of debt, is not having a plan. You must have a budgeting plan before you start attacking your debt head-on.
Your budgeting plan will help you focus your attention on your spending habits, painting a clear picture of where you can cut down and how much you have to throw towards debt. One of the main reasons why we have bucket loads of credit is because we’re spending more than we earn. So if you are drowning in debt, is a priority.
It’s difficult to pinpoint exactly which budgeting plan will work and which won’t. We’re in our unique financial situation and we all use our money differently. Choose a budgeting plan that works for you, here are some budgeting ideas to get you started.
Mistake 2: Not changing spending habits
Changing our spending habits can be tricky, especially when we have to start spending less. We’ve become used to our current lifestyle, making it difficult to cut back on certain things.
According to Art Markman one of the reasons why we struggle to manage our money is because we don’t have a tangible connection to our bank accounts. We have a stronger connection to the things we buy, even if we purchase online. The money we have is simply a number. We don’t see it or touch it, it’s just there.
As human beings, we have a stronger connection to the physical things around us. It takes effort for us to have a understand conceptual things, like our bank account or debt, because we don’t physically touch it. And this makes it very easy for us to swipe a credit card, without thinking.
When anything becomes a habit, we start doing things with minimal effort. Switching off the light before bed, making coffee or tea and even our driving style. We do these things without even thinking. Using our credit cards and spending, in general, becomes effortless. From the routine stop for the morning coffee to the weekly takeout dinner.
We have to break these habits so that we have more money to push towards our debt.
We have to learn how to stop living beyond our means and start cutting back where we can. After all, you can’t expect to keep spending money AND get out of debt at the same time.
Mistake 3: Paying off multiple debts
Most people try to pay off their multiple sources of debt – credit card debt, mortgage, student loan, car loan etc. – at once. This strategy will set you up for failure, because of compounding interest.
Generally, our credit earns compounding interest, which means the total amount keeps increasing month after month. We don’t pay attention to the interest, which is one of the reasons why our debt grows.
Luckily there’s a very simple strategy that you can follow. The debt avalanche method focuses on eliminating credit based on interest. The idea is that you focus all your attention on getting rid of the account with the highest interest rate. Once that account has been cleared, move on to the next highest account and keep moving down the list until you’re home free.
Mistake 4: Doing it alone
There’s no denying that debt is a personal matter, many people keep struggling because they’re too proud to speak out about their debt situation. If you’re not comfortable talking about debt to your family or friends, there are alternative measures you can take.
If you are struggling financially and don’t know where to go, debt counsellors, like Debt Rescue, are a viable option.
If you are struggling to pay your monthly expenses while tackling your debt, and you don’t know where else to go. Get in touch with us today and we may be able to assist you in your financial situation.