Mistakes make while becoming debt free
The decision to get out of debt is critical to financial security and freedom. The decision is an important first step. Actually, becoming debt free is a process. As with any other life changing process, there are ways to increase your likelihood of success. Then…there are mistakes that can slow you down or keep you from reaching your goal. Mistakes made while becoming debt free can cost you lots of time and money.
Mistakes made while becoming debt free
The main problem with mistakes made as you become debt free is that recovery can take a long time. Think about how quick, how easy, it was to get into debt. (From my point of view, going into debt is almost always a mistake.) Now, think about the time, dedication, and effort it’s going to take to become debt free. You don’t want to do things that will hinder the process. Do it right the first time and be done with it.
Here is a list of common mistakes made while becoming debt free and how to avoid them.
Common mistake Not using a spending journal
One of the most common mistakes made while becoming debt free is not using a spending journal isn’t used. A spending journal is a tool you use to track every penny you spend. The use of a spending journal is essential to having a reasonable budget. It lets you know what you’re spending your money on and when you’re spending it. The information in a spending journal is essential to developing a working budget. Keep a spending journal and keep it accurate.
After you’ve put together your budget, the spending journal will continue to serve you. You will continue to be aware of how much and what you are spending your money on. It can help you keep on track as you get out of debt by alerting you to any detrimental trends in your spending. It can also signal when it might be optimal to tweak your budget to increase its efficiency.
Most professionals recommend keeping a spending journal for two months prior to making a budget.
Common mistake: Not having a reasonable budget
You don’t just need a budget. You need a reasonable budget, one you can live with. I’ve known people who work themselves into a frenzy making a budget. Those budgets rarely work, because they are based on emotion or wishes rather than on how money needs to be used.
Look at your spending journal and make decisions as to what and how much you can (must) cut. Your spending journal will give you an accurate picture of your current financial life. It will help you make a budget that can be a guide to a better use of your funds.
The next common mistake made while becoming debt free dovetails with not having a budget.
Common mistake: Not changing your spending habits.
An old saying goes, “the definition of insanity is doing the same thing over and over again while expecting different results.”
Don’t waste time with do overs
You’re in debt for a reason. For many people that reason is their spending habits. By definition, a habit is behavior or practice that may be hard to give up. In other words a habit is something you do over and over again because it does give you the same result. In the past borrowing probably gave you a (false) sense of relief. As you’ve watched your debt grow that sense may have changed to anxiety, but you’ve been in the habit of borrowing, so you borrow. As you continue to borrow, you continue to build debt. That’s not what you want to do. You want to get out of debt. You need to change your spending habits. Change how you handle money. Spend less: Drive less—consolidate trips: Walk, use the bus: Quit eating out so much—take your lunch: Stop buying books and magazines—go to the library. You can exchange any number of spending habits for new, less expensive ones. Do whatever it takes to spend less.
Common mistake: Not setting aside money for an emergency
An emergency account is always appropriate. Taking this one step further, I’ll say, “It’s never appropriate to not have an emergency account.”
I know from personal experience that having an emergency account can really save you in a bona fide emergency. (An emergency can be defined as an unexpected event—think threat to your life or livelihood—that must be dealt with now). It allows you can handle your emergency with funds on hand and remain in budget.
When you put together your budget, you really need to include an emergency fund. In the beginning it won’t amount to much. Hopefully, you won’t have an emergency early on, but it’s important to immediately start saving against one. If you don’t start, you’ll never have any money set aside for emergencies.
Common mistake: Not prioritizing your debt
When you start to pay off your debts, you’ll still need to make payments against all of them. You’ll want make minimum payments on most of them, but pick one to put larger or additional payments toward. I generally recommend paying off the smallest debt first and then advancing in ascending order. When that debt is paid off, you’ll have freed money that can then be applied towards the next larger bill, and that should be your payment habit until you are debt free. For more information, take a look at my article on becoming debt free.
Common mistake: Trying to pay off multiple debts at once
Have you ever heard the one about how you eat an elephant? You do it one bite at a time.
That holds true for getting out of debt.
If you owe several creditors, don’t try to pay them all off at once. Work on one debt at a time until it’s gone then move to the next debt until all your debt is gone. Of course, you’ll need to stay current on all of, but put emphasis on paying off one at a time. The idea of becoming debt free isn’t intended to be so stressful that you give up and quit.
Common mistake: Not contributing to your retirement account
If you’re not contributing to your retirement account, you’re not preparing for your future.
It might seem like a great idea to suspend (or maybe not even start) building your retirement fund. And, why not use this tactic? After all it will give you more money to reduce your indebtedness. But, if you’re preparing for your future, you’ll feel better about what you can do today. That means you’ll be more likely to stick to your plan. Of course, you know better than anyone else just how bad your debt is. Ultimately, the decision will be yours.
Conclusion
This isn’t a complete list of mistakes made while becoming debt free, however in my opinion these are they worst.
There are right practices to ease the way to becoming debt free (and wrong ones that can hinder the process). Keeping a spending journal, living by a budget, and having emergency funds are not the only factors that determine your success or provide an optimal place to start.
Being in debt can cause stress and tension in the family, but so does the dedication and effort to become debt free. As I’ve said several times, becoming debt free is a process, and you’ll need to see progress before relief begins to take hold. Undermining habits will have you fighting an endless battle against debt and, probably, those closest to you. That could add to your stress. Attacking debt through right practices can ease you into progress, provide a cushion against emergencies, and help control any impulse to revert to borrowing.
Eliminate functional mistakes while you become debt free. Replace them with frugal habits. Avoid common mistakes made while becoming debt free.