10 mistakes people make when trying to get out of debt – Forbes Advisor

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Keeping debt under control and taking on debt responsibly makes possible a world of rewarding and interesting activities and acquisitions. Buying a house, going to college, covering unforeseen expenses like a new roof, even buying a car, all of that and more would be much more difficult without the ability to buy now and pay later.

But when personal and family debts become excessive, they can invoke powerful forces of unhappiness and frustration. According to recent research, those who go into debt have lower life satisfaction and emotional well-being, as well as poorer health and quality of sleep. This is why having the ability to repay debts is essential to personal financial growth and general happiness.

Paying off debt, however, is not always easy. There are many ways for a borrower to go astray from the burden of debt to getting off debt. Here are 10 of the most common mistakes people make when trying to pay off debt.

1. Being too hard on yourself

Over-indebtedness has a bad reputation. If you are overloaded with monthly credit payments, you might be tempted to take this as evidence of shameful personal weakness. But household finance specialists say the inability to resist indulgences is just one factor that can cause you to borrow more than you can repay quickly. And decades of research suggest that low income and lack of financial resources may be even more important factors than unwillingness.

In any case, it is a general problem. In May 2019, more than two in five U.S. consumers reported pollsters for the Office of Consumer Financial Protection (CFPB) they had difficulty paying a bill or an expense during the previous year. Those with lower incomes and lower credit scores have a harder time, and nearly one in five six-figure earners also struggled. So don’t spend too much energy putting yourself down. Instead, use that energy to avoid these other mistakes.

2. Do not take advantage of help

You don’t have to tackle the task of paying off your debts on your own. A nationwide network of nonprofit credit counseling services exists to provide people in your situation with one-on-one, one-on-one assistance to take control of your debt and finances. For a small fee, they can help you put in place a plan for managing and eliminating your debt.

The National Foundation for Credit Counseling (CNFC) can provide a reference to a local service.

3. Neglecting Financial Literacy

Being in debt isn’t just a lack of self-control. Knowledge of finance is also important. Research in the UK has found that low-income people with superior money management skills have lower debt-to-income ratios. Financial literacy, they discovered, leads to better borrowing decisions. For example, those who understood the effects of compound interest were less likely to engage in high-cost borrowing.

You can improve your financial literacy by studying books, magazines, and online personal finance information sources like Forbes Advisor. In addition, the non-profit association National Foundation for Financial Education has funded the development of several research-based financial literacy improvement programs.

4. Not respecting the budget

No debt repayment plan can be successful if your spending habits stay the same. To help you control your expenses, establish a budget.

All you need to do is track your income and expenses and spend less than you earn to stay in the dark. By following a few simple steps, even the most budget-conscious can come up with a practical plan to control expenses and balance them with income.

5. Not tracking your progress or rewarding your successes

You can harness human nature to help you achieve your debt reduction goals by invoking one word: gamification. Gamification uses your brain’s reward circuitry to help you reach your savings and other personal financial goals. The basic idea is to create challenges, competitions and rewards related to your debt reduction goals.

Key elements include tracking progress and, when milestones are met, rewarding yourself. For example, when paying off a high rate credit card, you can afford to buy an item of clothing you’ve always dreamed of. Personal finance apps like Digit and Qapital use gamification-like techniques to help get you started on the path to financial growth.

6. Fall into scams that prey on debt

Both for-profit and non-profit debt relief programs can be a boon to hard-pressed borrowers. They help debtors with credit counseling, debt management, and assistance by applying debt settlement techniques such as negotiating interest rate reductions, changing repayment terms, reducing amounts debt, debt consolidation and refinancing.

But crooks are also preying on vulnerable people with debt relief programs that charge excessive fees, have opaque terms and make unrealistic promises. The CFPB has an online database of complaints about debt relief programs. The NFCC and the Financial Advisory Association of America can provide references to legitimate programs.

7. Unnecessary filing for bankruptcy

Seeking creditors protection under Chapter 7 or Chapter 13 of the bankruptcy law offers a proven way to pay off your debts and gives you the opportunity to start from scratch. However, bankruptcy has its limitations as well as significant drawbacks, including a lasting impact on your credit report. While it definitely has its place, bankruptcy isn’t the best option for all overwhelmed borrowers. It is a good idea to study other approaches, including credit counseling, before playing the bankruptcy card.

8. Set unrealistic goals

While you can probably get out of debt, you may not be able to do it immediately or without sacrifice. For example, rather than trying to pay off all your debts at once, it is often better to settle them one at a time.

The debt avalanche method is one approach. This involves paying off your most expensive and dearest debts first, and then focusing on the most expensive debt until you’ve paid them all off. It’s going to take time, focus, and discipline, but it’s a more realistic strategy than somehow planning to get out of debt all at once. Other borrowers find the incentive they need by using the debt snowball method, in which you first pay off your smallest debts to build momentum toward your debt-free goal.

9. Neglecting the savings

It can be tempting to take every penny of income that isn’t otherwise spent on essential bills and spend it on debt repayment. However, it usually makes more sense to spend some of your available dollars and cents on building and maintaining an emergency fund.

If you have a viable fund for rainy days (for years the advice has been to store the equivalent of three to six months of basic expenses as a ballpark figure) then you are more likely to avoid d ” being forced to borrow to cover an unforeseen expense such as a medical bill, a car repair or an unemployment crisis. Since three months of spending can add up to several thousand dollars, saving even $ 1,000 is a good start. If you only set aside $ 100 per month, you can reach that level of emergency savings in less than a year.

10. Don’t increase your income

Paying off debt and avoiding debt goes beyond controlling spending. You also need sufficient income to support your lifestyle while reducing your debt. With that in mind, increasing your income can be an important part of paying off debt.

Research going back decades has shown that the amount of disposable income consumers have is a key, if not the most important, factor in determining how well they have paid off their debts. You may be able to increase your income by making your savings work harder. Another way to increase your income is to start working in parallel. Regardless of the source, earning more means having more money to pay off debt faster and being less likely to fall back into debt later.

Final result

These 10 mistakes aren’t the only mistakes you can make when trying to get out of debt. For example, another mistake could be taking out a loan secured by your home or other assets to pay off unsecured debt, due to the risk of losing your collateral if you don’t pay on time. But these are some of the most common debt repayment mistakes. Avoid them and you will probably find it much easier to reduce your debt and increase your happiness.

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