Deciding to own your debt is not always easy. And then following through can be challenging. But once you have had enough of the sleepless nights and phone calls from debt collectors, it is time to create a new debt-free reality. Even though committed to your goal, you can still create obstacles that block the way to financial freedom.
Here are 5 steps to avoid when trying to get out of debt.
When you finally face the truth of your debt situation, the first instinct can be to panic. It’s only natural. However, making money decisions should never be done during a time of mental stress. Your choices will be reactive rather than proactive. Take a deep breath. Remember, the situation is not fatal. Get organized and start working on a plan to get out of debt.
2. Not Making a Debt Reduction Plan
If your debt is out of control, you need a systematic plan to get rid of it. The first step is to identify your debt. Once you have a list of all your creditors, how much you owe, and your monthly payments, you can begin to access which debt reduction strategy will get you out of debt as soon as possible. When you have a plan with defined goals, you can measure your progress. As you make progress, you can celebrate, giving yourself the power to continue.
Tackling your debt can be overwhelming. And you will have setbacks too. You can quickly become frustrated and tempted to quit. It helps to talk to a neutral third-party who can help you prioritize your debt reduction plan. Which strategy should you use? Do you have additional options, such as negotiating with creditors or consolidating debt? A neutral person can help you find solutions. Your emotions move out of the way, and you can begin to think strategically.
3. Not Changing Your Lifestyle
Getting out of debt requires a total makeover of how you spend money. Most people end up in debt because of unnecessary spending, especially with credit cards. It feels like free money. And then when reality hits, they want their lifestyle to remain the same. But when you are trying to get out of debt, there will be a necessary disruption to your lifestyle. You will not reach your debt reduction goals if you continue living and spending as usual. You may need to put some activities on pause, such as eating out and picking up that morning coffee. Maybe you skip the luxury vacation this year and find something cheaper or free to do. Spending less time on social media can help too. You will avoid the FOMO syndrome.
4. No Realistic Budget
Your debt situation could be because you did not create a realistic budget to help you funnel your money in ways that build financial freedom. Now that you are focused on getting out of debt, you need a budget. If you created a budget, it needs to be adjusted to fit your new financial situation. Some long-term financial goals may need to be postponed as you direct more of your income to pay off debt. Be realistic about your income and fixed expenses. Plugin how much will go to debt reduction and savings. Whatever is left, if any, is disposable income. Keep your budget front and center when making every spending decision. Update your budget as you work your way through your debt accounts.
5. Canceling Savings
When trying to get out of debt, most of your budget will go to debt reduction. But this does not mean that you should stop funding your retirement and emergency savings accounts. If you have a 401(k) at work, take advantage of your employer match and continue to make your contributions. Try to max out your IRA if you do not have a 401(k). You still need to save for emergencies. Without an emergency fund, you could find yourself going into debt again.
Bottom line. Trying to get out of debt is not an easy task, but it is doable with commitment and a plan.