Getting out of debt seems like an unattainable goal at times. But with hard work and dedication, you can see your goals come to fruition. If you want to take that step to reduce debt, it will require you to commit yourself to repaying the debts that you owe.
While trying to get out of debt, some people unfortunately make mistakes. The common mistakes that people sometimes make can sabotage your attempt to get out of debt. Becoming debt-free involves more than simply paying off your medical bills and credit cards. It will instead necessitate you changing your spending and savings habits, understanding what you owe, creating a realistic budget and knowing when it is time for you to seek help.
Here are some common errors that you should work to avoid so that you can become debt-free:
1. Continuing the Same Spending Habits
People tend to revert to the same habits that they have built over time, including their spending. For example, you likely choose to eat at a few favorite restaurants, head to your favorite stores and engage in regular entertainment activities that cost money. However, if you are not willing to change your relationship with money and the manner in which you spend it, you will have a difficult time getting out of debt.
You can change your spending habits gradually by adapting budget-conscious habits such as opting to bring your lunch to work rather than eating out or drinking coffee at home instead of grabbing a cup at a coffee shop. By making small adjustments and adding to them, you can create smart spending habits that can help you to become and to remain free from debt.
2. Creating an Unrealistic Budget
It is common for people who want to get out of debt to try to create budgets. While creating a budget is important, it is crucial that the budget that you create is one that is realistic. Most people have no idea how much money they spend in different categories. You can start by tracking your spending for a month. When you do this, you should enter every expenditure regardless of how small it might seem. Once you have the data, categorize your expenditures so that you can get a clear picture of how much you are spending on everything, including gasoline, entertainment, restaurants, groceries, utilities and others.
Doing this exercise can also help you to identify areas that you can trim, helping you to save money that you can dedicate to repaying your debt. Your budget should be bare bones, allowing you a set amount of spending money beyond your living expenses with the rest dedicated to paying off your debts.
3. Failing to Save
Many people think that they should stop saving money for retirement or for an emergency fund while they try to pay off their debts. When you are trying to reduce debt, ending your savings can backfire later. Your budget should count saving around 10 percent of your income for retirement. If your workplace has a 401(k), you should take advantage of it so that your retirement savings are subtracted from your checks before you receive them.
It is equally important for you to have an emergency fund that contains from three to six months’ worth of your income. If you suddenly lose your job or suffer an unexpected illness and do not have an emergency fund, you can quickly spiral even deeper into debt until your situation improves.
4. Trying to Reduce Debt Without Help
Some people make the mistake of attempting to get rid of their debt without seeking help. It is difficult for most people to be able to take an objective look at their spending habits and the areas where they might be able to cut their expenses. When you get help with your debts from a debt relief or debt management company, you can benefit from receiving the neutral views of a third party that is experienced in helping people to get out of debt. This can make your journey to a debt-free life much easier for you to manage while avoiding making mistakes that could torpedo your efforts.
5. Not Knowing How Much You Owe
Some people simply do not know how much they owe and to whom they owe their debts. In order to get out of debt, it is important for you to understand how much you owe and to which creditors. You can receive a free annual credit report from Experian, Equifax and TransUnion once each year from annualcreditreport.com. You should stagger your reports so that you obtain one once every four months throughout the year. Review your credit reports once you receive them, taking care to note any mistakes. You should correct any errors that you discover with the credit reporting agencies. Getting your credit reports also allows you to see the total amounts, including interest, that you owe to all of your creditors so that you can decide how to approach your repayment plan.
6. Closing Your Accounts
It can feel great to pay off a credit card or other account. You might be tempted to close the account once it is paid off. However, this can cost you points on your credit score. Part of your credit score is determined by the lengths of your credit accounts. When you close an account, it can cause your credit score to fall. You should instead leave just a few of your paid off accounts open to show that you have a lengthy credit history and that you are able to demonstrate restraint despite having credit readily available to you.
Getting out of debt is a dream that most people have. While it might seem beyond your reach, becoming debt-free is not impossible. Avoiding these mistakes can help you to become free of your debt so that you can enjoy a financially sound future. For help with getting out of debt, contact Christian Debt Counselors today to schedule your consultation.