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Debt is easy to take but difficult to pay back. Banks surely make it seem easy for you to pay your debts but it’s a financial burden that’s not leaving you so soon, especially if you’re spending lavishly, not having a strategy and not doing anything to pay off that debt faster.
Today let’s discuss the things you shouldn’t do when you’re in debt. Keep these simple pointers in mind and I’m sure your debt repayment journey will be much easier.
9 Things To Avoid When You’re Getting Over Debt
1. Continue to use your credit cards
There was a poll conducted by CreditCards.com where they found out that 51% of U.S. adults have increased their credit card debt during the pandemic.
Continuing to use your credit cards while you’re in debt will cancel out any progress you’ve made so far.
The reason you got into debt in the first place is due to credit cards (unless you took a home loan), why would you fall back into the same pit you dug.
I’m not suggesting you cut your credit cards (if you can do it), freeze your credit card accounts, that’s possible!
If you can’t do that, then take the card and keep it away from you, don’t use it at all.
The more credit cards you use, the more minimum payments you need to pay and the worse is your debt payment.
2. Immerse in Impulsive Spending
65% of the people who have massive debts usually fall into the category of impulsive buying.
Impulsive buying is a term given to a person when he buys things without planning. Let’s say you enter a mall – you see an iPhone – you fall in love with its specs – you immediately buy it!
You came into the mall to shop for clothes and groceries and you ended up buying a smartphone.
Impulsive spending is the same as impulsive buying, you spend instantly without thinking too much, you don’t ask yourself questions such as – Do I need this phone?
You just say – I want this phone and the deal is closed. Today you bought a phone, tomorrow a car, then another car.
All this from your credit card and there you go – A huge debt you can’t repay. Now is the time you have to pay close attention to your spending.
You can’t spend as you did before. You have a debt to repay. I recommend you make a budget and stick to it.
That will help you not overspend and keep you away from impulsive spending. Here’s my Free Budget Worksheet for you to try it out!
3. Making Minimum Payments
If it’s possible, you’ve got to do it. You should be making minimum payments at all times. This is the most important thing and you need to follow it.
There is one exception to this rule – If you’re using Debt Avalanche or Debt Snowball Strategy to pay off debt (which I insist you use), you will end up paying excessive amounts to either the smallest debt you have or the debt with the highest interest. Others debts will be on a minimum payments basis.
4. Panic Panic Panic
Debt isn’t going anywhere anytime soon. There isn’t any use panicking so much. Just take it easy, relax and focus on paying your loan.
I know the stress you have right now may over exceed the amount you can take, but that doesn’t mean you spend money and go bonkers.
Panicking won’t solve problems, it will just create more problems. Invest some time in yoga, meditation, exercise, evening walks to calm yourself down.
5. Not Saving Enough
You may think that when in debt, go all in. That means you can’t save money because all of your money is being directed to paying your debts.
While that makes perfect sense, the reality is that you can’t live without savings. You need to save for your expenses, for some events which suddenly occur or just to ensure you have money when you need it.
Having access to savings keeps you away from visiting the bank and asking for another loan. That’s the last thing you want to do.
Just like you want to get rid of debt, the same way saving is crucial and unavoidable. Save some, the rest goes for debt payments.
6. Seeking Debt Consolidators
Debt consolidation rolls out multiple debts into one single debt. The main purpose of using debt consolidation is to reduce your stress.
It may also reduce your interest rate and let you pay less each month than what you were paying before.
Let’s say you have four loans with a total monthly payment of Rs 70,000
The average interest rate charged on all these is 15%. When you consolidate your debt, your total monthly payment reduces to Rs 40,000 and the interest rate drops down to 11%. Isn’t that awesome!
Less stress, less burden, all debts combined make it easier for you.
While it sounds great, the real story is different. By reducing your monthly payments, you’re extending the time frame of your loan.
Using the power of compound interest, your total loan amount will be far more than what you would’ve paid if you never consolidated your debts.
These companies enjoy you being in debt for a longer duration because that’s how they make money.
If your goal is to stay in debt for longer and pay more eventually, debt consolidation might be the perfect option for you!!!
7. Saying NO To Part-Time Work
As long as you can make money out of it and use that to pay your debt. It’s not the easiest way, it takes a lot of time and hard work, but once you have figured it out, making money gets easier.
You may take 3 months or 6 months to make your first income (if you’re starting a business), working part-time is a good option right now cause you can make money from the first month itself.
There are hundreds of stories of how people who were in high-interest debt and got out of it by taking up one or two part-time jobs while also doing their full-time job.
It’s not impossible, many individuals are doing it today and are reducing their debt massively.
You can also rent out an extra room (if you have) or sell things you don’t use anymore. Anything that brings money to the table, you’ve got to try it.
Sage Tip: When your monthly income increases, make sure you don’t increase your expenses. The additional income you now earn has one goal – to help you get debt out of your life, Nothing else.
8. Being A Man Without A Plan
Now that you’re doing a part-time job, using your savings, don’t get all cosy, you still don’t have a plan to vanish Debt from your life!
You need to know how many debts you have, their due date, their minimum balance, the maximum you can allocate to each debt, etc.
A well-structured plan includes a few basic things like
- Don’t quit your part-time job.
- Be consistent in paying excess money.
- All bonuses, gifts, perks, incentives should be spent on clearing the loan and not on luxuries.
- Save as much as you can.
Your plan should be simple and effective. It should be on autopilot and it should be flexible.
When it comes to paying off debt the two strategies I highly recommend is Debt Snowball and Debt Avalanche.
I’ve written an article stating the pros and cons of both these debt repayment strategies. You can check it out here – Debt Snowball or Debt Avalanche.
One focuses on satisfying emotions to maintain consistency and the other focuses on slightly reducing interest payments.
Choose the one you’re most comfortable with and get started immediately.
9. Emptying Your Emergency Fund
When you’re focused on getting rid of debt, you tend to pay off as much as you can with all the money you have.
So you empty your emergency fund account hoping it will lessen your burden.
But what if you face an emergency tomorrow? You’ll use your credit card to pay off the expense right? Now you are bound to pay the new debt you just incurred.
- You don’t need to keep a lot of money in your emergency fund, 3-6 months of expenses will do the work.
- Unless an emergency, don’t use the funds.
- Don’t continue adding money to your emergency fund if you have a huge debt. Keep some amount and leave it.
The Bottom Line
When it comes to reducing your debt. There are few things you need to keep in mind like living frugally, taking up an additional job to pay more towards clearing debt.
Regardless of how you got into debt, you’ll probably have a similar strategy to tackle debt. You’re wrong if you think you’re going to pay your debts without sacrificing.
It’s going to take time and a huge chunk of your money. Once it’s paid, you’ll have so much excess money, a part of that can go towards investments and the rest towards your expenses.
These debts are usually for 5 to 20 years depending on the type and amount of loan you take.
You can significantly reduce the time frame by making larger monthly payments and eliminating debts one at a time.
Only you can make your life easier and it all starts with paying off your debt completely. Once you do that, promise yourself to never take on debt again.
How do you tackle debt? What effective strategies do you use to wipe out debt? Share it in the comments below.
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