Do you feel like you’re drowning in a raging sea of bills and loans? If so, you’re not alone. Eighty percent of Americans hold some kind of debt according to a 2015 report by The Pew Charitable Trusts, and many struggle to create a peaceful financial future for themselves and their families.
From lingering student loans and credit card bills to hefty home mortgages and car loans, debt is all around us. It’s often unavoidable – after all, it’s nearly impossible to pay for every necessary major purchase outright. But financial freedom is possible.
If you’re starting your journey to become debt free, congratulations! Being without debt can improve your work, health, relationships, and nearly every facet of your life. Keep in mind that freeing yourself from debt involves more than just paying off a few credit cards. You’ll need to make a lot of important decisions along the way that can have a lasting effect on your financial future.
Many people start with the best of intentions, but their choices prevent them from actually ridding themselves of their debt. Here are seven common mistakes consumers make as they plan for their debt-free future.
1. Keeping the Same Spending Habits
No one can do the same thing over and over again and expect to get different results. To get out of debt, you need to know what you can reasonably afford to spend within a given month and change your spending habits accordingly so that you stay within your means.
Creating a realistic budget is a great way to overcome getting stuck in a rut of unnecessary spending. Review your expenses and decide which are necessary and which are more than you can handle. Making small cuts to your day-to-day spending can make a big difference.
2. Signing Up for Debt-Relief Programs Without Understanding Them
Getting out of debt is rarely a fast and straightforward solution, so if a debt-relief program promises to help you get out of debt quickly, you should look elsewhere. Check with the Better Business Bureau or another credible organization before signing up for a program, and understand that even the best programs require time before you reach the results you desire – patience is key when working your way out of debt.
3. Stopping Contributions to a Retirement Account
It might seem sensible to pour all your savings into paying off your debt, but forgetting about your retirement account could be a costly error in the long run. Retirement savings contribute to your financial stability after you stop working, and the sooner you start planning, the better off you’ll be.
Current debt shouldn’t sway you from planning for a prosperous future, so try to find other areas where you can cut your spending instead.
4. Not Setting Aside Emergency Savings
Just one unexpected car repair or an emergency vet visit can leave you with no way to pay the bills until your next paycheck.
We recommend putting three to six months of expenses into a savings account to cover any future emergencies. Skipping out on emergency savings can leave you at risk to fall further into debt down the road, when an unexpected expense arises. While it may take some time to set aside enough money to cover months of bills – especially if you’re focused on paying off your debt – even a small percentage of each paycheck will add up over time.
5. Forgetting to Verify Your Credit Report
Do you take the time to regularly verify the accuracy of your credit report? Many people don’t, which might leave them needlessly vulnerable to errors.
Every 12 months, you’re able to receive one free copy of your credit report from each of the three major credit bureaus. Take advantage of this. Review them for inaccurate information, such as delinquencies or debt that’s not yours, and file a report immediately if you think you’re a victim of fraud. You can also monitor your credit score monthly for free* if you’re a PSECU member.
6. Trying to Pay Off Several Debts at Once
If you have multiple sources of debt, you might be tempted to pay off a large portion of each one every month, but not all debts are created equal.
Instead of paying off each debt evenly, target the debt with the highest interest rate first. When that’s paid off, keep working your way through the debts with the highest interest rates first – one by one – until you’re left with more manageable expenses. Of course, keep in mind that you’ll still need to make minimum payments on each of your bills and loans, but putting any extra money toward those with the highest interest rates first can keep interest charges from piling up.
7. Closing Credit Card Accounts When They’re Paid Off
As you continue to pay toward your credit card debt, you might be excited at the thought of getting rid of your card once and for all after your debt is fully repaid – just think twice before you do. Cutting off a source of credit can actually harm your credit score, which is based not only on how much money you owe, but also on how much credit is available to you. Additionally, closing an account will change the average age of your accounts and could impact your credit mix.
Of course, sometimes it might make sense to close your card, especially if it has a high annual fee, but keeping your credit card open and choosing not to use it could be the better financial decision for your particular situation.
Enjoy Financial Freedom
At PSECU, we’re here to help you explore your options and find ways to lessen your debt and enjoy financial independence. Check out money-saving tips on our WalletWorks page.
*PSECU is not a credit reporting agency. Members must have PSECU checking or a PSECU loan to be eligible for this service. Joint owners are not eligible.