If you feel like I did when my family was drowning in debt, you understand the disabling feeling of barely keeping your head above water, the worries of being one paycheck away from financial disaster, and the dreadful sense of being stuck there for eternity.
Debt can cause tremendous stress, as it spills over to other areas of our lives – our relationships, our health, and our psyche.
Though we may not chat about our debt with friends over drinks, it is a widespread issue facing countless individuals. In fact, the average American household is approximately $130,000 in debt.
Making the choice to wipe out debt is the first, most crucial step toward debt freedom.
But diving into debt repayment hastily, without any preparation or prior thought, can lead to crucial mistakes which slow, or even halt, progress.
Granted, mistakes are natural and teach good lessons, but a little prep work and know-how can give you a head start and keep you moving in the right direction.
The 4 biggest mistakes (and how to prevent them)
1. Adding to debt
You start slashing away at that debt, successfully paying extra on the principal balance for a couple of months, then BOOM, your insurance bill comes and you don’t have the extra money to pay it. You decide to charge groceries for the month on your credit to enable you to pay the insurance bill.
Adding to debt while trying to repay it, though counterintuitive, is a common mistake, and can be avoided by funding the all important emergency savings account prior to starting debt repayment.
How much to save in an emergency fund? It’s an individual decision – $500, $1000 or the oft recommended equivalent of 6 months living expenses are all better options than having nothing at all.
2. Not prepared for the unexpected
Unexpected expenses should be expected. It’s rare for the average person to get through a month without an unexpected expense, whether it’s a birthday gift, car repairs, medical expenses, or a dead washing machine.
The aforementioned emergency fund is an absolute necessity, but further your preparedness by getting organized.
Look ahead a year and list potential “unexpected” expenses, considering the age and condition of your car and appliances, as well as gifts you will buy and any upcoming travel (e.g. weddings, family reunions, or vacations). Plan to sock enough away in emergency savings to prevent these expenses from causing further debt accumulation down the road.
3. Cutting expenses too much (or not enough)
Are you like me and dive head first into new goals and ventures? If so, debt repayment could look something like this: the first month you drastically cut expenses – you don’t go out to eat, reduce grocery spending to the bare minimum, stop going out with friends and save a boatload of cash. Though you’re on the right track, after a couple months you start to feel the deprivation. By the third or fourth month, life is such a drag, debt repayment doesn’t even seem worth it. I mean, why sacrifice today for tomorrow? YOLO!
The opposite end of the spectrum can be equally as bad. You want to pay off the debt, but just aren’t willing to make any sacrifices in spending to get you there. You enjoy your life the way it is and, although your want the debt gone, you just can’t see any areas you want to cut back on to make it happen.
Experiment to find a happy medium that works for you, one where you don’t feel constant deprivation, but still allows you to reduce expenses enough to make progress.
4. No specific plan
If you headed out on a cross country road trip without navigation or a map, would you get to your destination? I’m guessing no, no you wouldn't.
As with any other goal, the roadmap for debt repayment is an important piece of the puzzle, and without it, chances are you will never get to your destination.
Research has shown people who write down their goals, the steps necessary to reach those goals, and create accountability for their progress are much more successful at reaching their target goal.
Are you ready to knock out that debt? Avoid these four mistakes and, with a little planning and prep work, eventually you will turn your dream of debt freedom into reality.
Amanda’s family successfully paid off over $100,000 in debt on one income, while still living an abundant life. She blogs about debt and living a “rich” life over at centsiblyrich.com.