There’s nothing easy about being in debt. You live with a constant fear that you’ll wake up one day and lose everything. You dread opening the mailbox because you know you’ll find another bill you can’t afford. There’s a rush of embarrassment when you can’t explain to your coworkers why you can’t eat out with them. More than anything, there’s the absolute soul-crushing weight of feeling like you have completely failed in life.
If you’re at the point where you’ve had enough and want to do something about your debt, you’ve taken the first step. With a mindset focused on taking action, you’re in a much better position to actually address your debt. However, if you’re not careful, your efforts to overcome debt could be what makes your situation even worse.
Here are five common mistakes that people recovering from debt make, along with five better ideas.
1. Spending the Same Way You Always Have
Believe it or not, one of the most common mistakes that people in debt make is continuing the spend the way they always have. Since your spending habits are probably what landed you in debt in the first place, this is absolutely the wrong foot to start your journey towards recovery on.
Why It’s a Bad Idea
Not changing your spending habits when you’re in debt is like continuing to drive at 80 MPH when the check engine light is on. You know there’s a problem – you’re just not doing anything about it. Failing to change the way you spend your money will offset your other efforts and leave you spinning your wheels.
A Better Solution
Start by making a feasible, structured budget and stick to it. Notice, I said feasible. Budgeting is like dieting – you absolutely have to make some cuts, but you still need a cheat meal here and there. In the same vein, your budget needs to realistically address your living expenses, allow you to indulge in some pleasurable purchases now and then, and, obviously, reduce the amount you spend each month. In particular, look at the following areas to reduce spending:
- Pleasure spending
- Always buying name brand items
- Outsourcing chores (laundry, yard care, etc.)
2. Putting Everything on a Credit Card
When people start running behind on mortgage payments, auto loans, and even utility bills, many people’s first reaction is to put their debt on a credit card. If you’re serious about getting out of debt, this is one of the worst things you can possibly do.
Why It’s a Bad Idea
When you charge your debts to your credit card, you’re not really paying them – you’re just shifting who you owe money to. You may have to pay a late charge for being behind on a car loan but that’s nothing compared to the interest you’ll accumulate on a credit card. If you continue to charge to your card, you’ll quickly find that the unpaid balance accumulates debt much faster than if you hadn’t paid your bills.
A Better Solution
If you need fast cash to pay a debt, consider taking out a personal loan. You can tackle multiple debts with the money you receive, typically pay far less interest than on a credit card, and take several years to pay it all back. The most valuable resource for people getting out of debt is time. A personal loan can help buy the time you need.
3. Taking a Second, Part-Time Job
If you’re in debt, one of your solutions might be to simply make more money. That’s a great line of thought. The problem is that most people turn to taking a second job, usually on a part-time basis. While this might net you a little bit of extra income, the cons outweigh the pros for people struggling with debt.
Why It’s a Bad Idea
Part-time jobs, by their very nature, put a lot of hardship on people who already have a full-time job. You have to deal with inflexible work schedules, low pay, and a lack of benefits. Your other requirements in life, like getting your car serviced or picking up your kids from daycare, don’t go away just because you have a second job. That added stress will compound with the anxiety you suffer from debt, making your life even more unbearable.
In short – you’re taking on a lot of extra burdens for very little gain.
A Better Solution
If you’re looking for additional ways to make money, consider opening your own online store.Drop-shipping is a common method that online retailers use to turn a profit while keeping their costs low. Having your own online store will allow you to be flexible while you get the additional income you need to stabilize your finances.
If product sales are not your cup of tea, you could also set up a blog and monetize it via one of the many popular affiliate programs. With either approach, setting up a good content marketing strategy as a beginner will have a huge impact on your success. Just look for a good, free guide to help you get started on the right foot.
4. Trying to Pay All Your Debts at Once
You may pride yourself on being able to multitask, but when it comes to paying off debt, trying to tackle multiple projects at once is not a good idea.
Why It’s a Bad Idea
Trying to address numerous debts at once can take a very long time. Since you’re not investing a whole lot into each debt, you prolong the life cycle of those debts. For debts involving credit cards, this means you continue to accumulate interest.
A Better Solution
Prioritize your debts and tackle the worst one first. I’d recommend you start with whichever credit card carries the highest interest rate. Once that’s paid off, move to the next one. You can still continue to pay on your other debts – just channel most of your additional payments into your biggest debts.
5. Not Contributing to An Emergency Fund
There’s a stereotype that people with heavy debts must be irresponsible with money. This isn’t always the case. Often, people fall into debt because of an unplanned medical expense, car repair, or death in the family. When these pop up, many people have no choice but to suspend other payments to afford them. That doesn’t make you an irresponsible person but it is irresponsible if you don’t have a way to deal with these emergencies when they pop up.
Why It’s a Bad Idea
Without cash reserves on hand for emergencies, you risk falling into debt again. One unexpected bill can land you back in debt, whereas it takes an average of 13 months to pay off debt. Not having an emergency fund means that over a year’s worth of effort can be instantly squandered.
A Better Solution
Make your emergency fund a priority when you establish your new budget. Aim to contribute at least 10% of your gross monthly income each month until you have anywhere from six months to one year of your total income saved up. If you can’t afford that, pay in what you can. Just make sure you’re paying something.