Debt creeps up on you bit by bit, and before you know it, you’re drowning in it. With the countless credit facilities available nowadays, it’s so easy to borrow more than you are able to pay back over a few months. If it’s any consolation, know that you are not alone. Most people have found themselves in an unpleasant debt situation at least once in their life. The upside is that being in debt isn’t a permanent problem. The reason that most people find themselves unable to achieve debt-free status despite making regular payments and seemingly doing everything, is that they keep on making common debt mistakes that keep them in debt.
Here are the most common debt mistakes that people make:
You don't have a plan
After finding yourself in a deep debt hole, the first thing you need to do is make a plan. This includes finding out all the information about your debts and your creditors, such as the amount left to pay, how much the interest payments are, the minimum payments, any concessions available etc. A plan allows you to identify which loans are costing you the most money (by paying off high interest loans first, you will save money in interest fees), which lenders are willing to come to a settlement and which are the easiest to pay back. Most people try to tackle debt by blindly throwing more money at their debt without any long-term plan and find that their mountain of debt isn’t becoming any smaller.
Setting unrealistic goals
Trying to settle a debt that took years to accumulate within just a few months isn’t practical - the only thing that will happen is that after a miserable couple of months where you’ve been penny pinching and living meagerly, your debt is still as large as ever. Setting unrealistic goals leads to demotivation. Set SMART goals and don’t hesitate to go back and rework them with time as needed. For example, a SMART goal could look something like this:
Contribute Rs. 35,000 per month towards debt repayment, aiming to reduce total debt value by 20% every year and be out of debt within 4 years.
Not changing lifestyle / spending habits
Commitments towards becoming debt free involves making significant changes to your lifestyle and spending habits. After all, your current way of life is what got you into debt in the first place. By continuing to indulge in these common debt mistakes, even if you do manage to pull yourself out of debt, the risk of falling back into it is very high. Your number one priority for the next few years should be getting out of debt.
Not automating payments
Automating your debt payments is a life hack that has been found to actually work. By instructing your bank to automatically make the payments every time you get your salary, you remove the temptation of cutting back on your debt repayment amount just this month. This also removes the illusion of you having your entire paycheck in hand to spend, when the reality is that only a small portion of your paycheck is actually available for your expenses. This will help you budget your expenses better.
Paying off only interest
It’s easy to get lulled into a false sense of security when you manage to stay on top of your regular interest payments without even missing one. However, avoiding the bulk of your debt that looms in the distance, growing closer and closer every day, is a common debt mistake a lot of people make. Make sure you are paying not only your interest fee, but also an extra amount each month to lessen the principal value.
If you are feeling sorry for yourself and treating yourself often to make yourself feel better about having to pay off your debts - don’t do it. Take responsibility for your actions and acknowledge that it was poor financial planning that got you to this stage. Being in debt doesn’t mean that you have failed in life. Focus your frustrations and anger towards getting out of debt as quickly as possible, and not in trying to make yourself feel better or get sympathy from your creditors.
No idea why you are in debt
By having no idea how you fell into debt, the risk of repeating those same mistakes in the future are high. Analyse what exactly happened so that you can prevent it from happening again at all costs. It might have been poor spending habits, taking out a high-risk loan without reading the terms and conditions or borrowing money from an unethical lender. By finding out where you went wrong, you can avoid falling into such a situation again. (Read here: Financial Habits to Avoid)
Sign up with risky debt-settlement programs
Due to advanced data gathering techniques, chances are that debt-settlement programs will find you when you are in debt. They will offer you very attractive debt-settlement schemes where they will repay your entire debt, and you can pay them back over time. However, these companies tend to prey on poor desperate people and take advantage of them charging high interest rates and lay payment fees, and even resorting to unethical collection practices.
Being in debt is nothing to be ashamed of but try and pull yourself out of it as soon as possible. You will find that with a bit of hard work and determination, and by avoiding the above common debt mistakes, you can get out of debt as quickly as you got into it.