5 Mistakes to Avoid While Getting Back on Financial Track
If you’re paying down your debt, then you know it is a challenging task. It may become tempting to look for ways to cut corners, however these options may cost you more time and money. Mistakes during debt payoff occur often and can sabotage the efforts you’ve made to improve your financial life.
New Era Debt Solutions outlines 5 common mistakes that should be avoided in your journey to a debt free life:
Not Having an Emergency Fund
In an attempt to pay off your debt quickly, you may be inclined to use your entire savings. This decision could end up putting you in deeper debt. When emergencies like an unexpected car issue or a medical expense happen, you must be prepared. Bankrate says that 36% of Americans would either borrow from friends or family, take out a loan, or use credit cards to handle a $1000 emergency. To make sure you do not have to borrow more money, save at least a small emergency fund.
Set up an automatic transfer each month to your savings, to save for emergencies. Even if it is only a small amount of money each month, it will add up over time.
Using Your 401k
When facing a large debt, you may be tempted to dip into your 401k. These accounts do allow you to borrow money from yourself and gradually pay it back with interest. You have five years to repay these loans unless you are fired or resign from your job, in that case you usually have 60 to 90 days to repay the loan. A 2014 study from the Pension Research Council found that 86% of workers in the sample who left their jobs with a loan outstanding eventually defaulted on the loan. By taking money out of your 401k, you’re robbing yourself of future financial security.
Keeping The Same Spending Habits
Humans are creatures of habit, from what we do in our spare time to what we eat. There is comfort in routine, but when it comes to getting out of debt, change is necessary. If you are bringing in $4000 a month but spending $4500, you need to remedy that deficit, by spending less or making more money. According to the Bureau of Labor Statistics, the average American household spends about $3,000 a year dining out. Bringing lunch to work or eating at home is a great start to forming new and frugal living habits. It is tempting to use your credit card to earn cash back or travel miles on everyday purchases. However, if you cannot pay off these purchases you may want to switch to cash only until your cards are paid off.
Only Paying the Minimum
While it may seem like you are getting more for less, paying the minimum balance each time could leave you paying more in the end. The way credit card companies make money is by getting you to pay interest on items you buy with the card. If you are unsure what your interest rate is, check your bill or call the bank. When you make a payment that is not the full amount of the balance, interest is added to the principle. The next month, the item will cost the original amount plus any accrued interest. If this keeps happening each month the interest will keep building. This is a slippery slope that could cost you much more than the initial item was worth.
Try using the snowball method instead of paying only the minimum on each debt. The snowball method is where you list your debts smallest to largest and make the minimum payments on all of your debts except the smallest. A small debt paid off is one less bill and one big success.
Relying Solely on Bankruptcy
When debt keeps piling up and seems unbearable, bankruptcy may seem like the only way out. While many of your debts might be forgiven, you could lose other assets, such as your home or your car. Your credit score will also take a massive hit. Credit Karma says that Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 remains for 7 years.
Continuing to Use Your Credit Cards
You may be driven to use your credit card to earn rewards or simply because you do not have money in your bank account to make necessary payments. If you are chasing rewards, it may not be a fair trade if the interest rate is higher than the cash back amount. This can be a slippery slope. Each month the amount due will increase until it is no longer manageable. You may have to stop using credit cards altogether in order to pay them off.
Not Researching Debt Relief Programs Before Choosing One
When you are over your head with debt, finding an effective solution can seem impossible. Debt consolidation, debt settlement, debt forgiveness, and credit counseling are legitimate options if you go with a reputable company. If the company requires payment upfront it can be a sign that you are being conned. Another red flag is if they promise a specific outcome, as no one can guarantee what concessions your creditors will be willing to make. Before choosing a debt relief company, make sure they are licensed and do not have excessively negative reviews.
New Era Debt Solutions has settled more than $250,000,000 dollars of debt since 1999 and wants you to be our next success story. If you need assistance achieving financial freedom, contact one of our friendly counselors at New Era Debt Solutions to learn more about finding the debt relief option that best fits your needs and budget. Our counselors are with you every step of the way.