Getting out of debt isn’t nearly as easy as getting into debt, so use this secret weapon. Here’s how, plus three more tips to avoid debt repayment pitfalls
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Q: We’ve been struggling to pay off our debts for what seems like forever. We get one bill paid off and another seems to come up out of nowhere. It’s not like we don’t know about the bills; we do. But we’ve been married going on eight years and neither one of us remembers a time when we didn’t owe money to someone. What are we doing wrong? ~Trisha
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Debt can be a tricky thing, and when we use credit, it unfortunately takes much less time to get into debt than out. Whether you’re dealing with credit card balances, vehicle loans, student debt, payday loans, or other financial obligations, just when it feels like you’ve finally got the upper hand, life happens and the path to debt-freedom takes a detour.
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However, don’t let a detour derail you. Here are four insights into debt repayment pitfalls that you could be inadvertently making, and what to do instead.
Continuing to use credit
Breaking the cycle of debt requires diligent effort, and when you continue to use credit while you’re trying to pay off what you already owe, you’re undermining your efforts. Eliminating the use of credit will allow you to make mindful choices about your current spending, ensuring you can allocate more funds towards debt repayment. It stops the vicious cycle of using credit cards to make ends meet, followed by a line of credit or payday loan to pay them off, or having to find yet another source of funds to pay the rent.
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The fix? Create a budget and start living within your means. Breaking free of a reliance on credit isn’t easy and it can take a few months to get there. Until you do, you’re simply making payments on the interest without paying off what you already owe.
How to Break the Cycle of Living paycheque to paycheque
Not accelerating your payments
When tackling debt, to get ahead, you must pay more than the minimum. It’s important to understand, required minimum payments are only intended to meet your contractual obligation and keep your account in fair standing; they are not designed to help you pay off the entirety of what you owe. Paying debt off requires making additional payments, and for most people, therein lies the biggest stumbling block, especially now with living costs as high as they are.
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The fix? If an inability to earn extra cash is holding you back from accelerating your payments, choose a debt repayment strategy that maximizes the effectiveness of the payments you are able to make. The snowball and avalanche methods are the two most popular choices because they work. Once you gain momentum and life gets a bit easier to manage, look for ways to generate some extra money to pay your debt off even faster.
Snowball vs. Avalanche Explained: Which Works Better?
Misjudging the discretionary amount of essential expenses
For a household budget, essential expenses typically include housing payments, utility bills, groceries, transportation costs, medical expenses, costs related to kids, as well as savings and debt payments. While discretionary expenses cover everything else, e.g. clothing and shoes, haircuts, a gym membership, vacations, or takeout food with a friend, most of our essential expenses have a certain degree of discretion attached to them as well.
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When grocery shopping, for example, buying name brands versus store brands will increase the bill. With a vehicle, payments for a new car, rather than a good used car, hit a budget harder. Upgrading your cellphone every two years, rather than paying it off and using it for an extra year or two, means the additional financing charge remains on your wireless bill. Committing to as high a mortgage as you qualify for, versus buying a more moderate home, means spending thousands of dollars more each year. Underutilizing the discretionary, flexible aspect of each of your essential expenses, could be inflating your overall household spending by hundreds of dollars every month.
The fix? Analyze each of your essential expenses carefully. For two months, review every single bill line by line to ensure that you truly need what you’re paying for. If you aren’t sure, scale back temporarily and test it out. For instance, could you replace top tier internet with second tier, or go with one video and audio streaming service for your family, versus five. If scaling back leaves you feeling short, scale up step by step and evaluate your options carefully as you go.
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How to Stay Motivated When Paying Off Debt
Ignoring the importance of savings
When you’re focused on trying to pay off as much debt as you can, it’s easy to neglect your savings account. However, that account is like a safety net for unexpected bills. Even though you might be paying more interest on your credit card than you’re earning in your savings account, the dent you made in your balance owing will be wiped out if you need to use your credit card to pay for a car repair bill. Think of savings as your secret weapon against the potential for further debt and tap into it only for emergencies.
The fix? You’re not alone if you’re wondering how you’re supposed to come up with money to put into your savings account. That’s where a budget becomes your best friend. Outline a budget that accounts for all of your expenses, debt payments, but also contributions to savings. Ensure that the amount you’re saving is proportionate to the lifestyle you’re living.
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How to Shift to a Savings Mindset and Make Saving a Priority
The bottom line on avoiding debt repayment pitfalls
It can be frustrating to feel like you’re doing everything you can to pay off what you owe, and still not getting ahead. Strategies to accelerate payments, avoid credit, and utilize discretionary options for essential expenses, are some of the best tricks you can use to get out of debt fast. However, to get the biggest bang for your buck, employ those strategies in addition to a realistic budget. Then you won’t only know how much to save and spend on essentials, you can factor in a splurge from time to time, too.
Related reading:
13 Money Saving Tricks to Pay Off Debt
How to Take Action When You’re Struggling with Credit Card Bills
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Is This Missing from Your Plan to Get Rid of Your Debts?
Peta Wales is President and CEO of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Peta by email, check nomoredebts.org or call 1-888-527-8999.
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