вторник, 28 октября 2014 г.

7 Debt Repayment Mistakes You’re Making and How to Stop!

7 Debt Repayment Mistakes You’re Making and How to Stop!

7 Debt Repayment Mistakes You’re Making and How to Stop!

First I LOVE this picture! It’s gorgeous so great choice there. But overall, I love this post! You have so much genuine and personal knowledge and I really enjoy reading about the success and then slide back with paying off the $5,000 credit card! Our cat had emergency surgery last month and we are for the first time ever experiencing credit card debt. However, we chose to not use our emergency fund, mostly inspired by your story Here’s why, we took out a care credit card which is interest free for 6 months, and my credit card is brand new so it’s interest free until September of 2017. The plan is to have the care card paid off this month, and the credit card balance paid off by February. I definitely understand, how being frugal can really burn one out. Thanks for always being motivating and inspiring!

Thanks Amanda. Credit cards are a good and bad thing to have. My ideal would be to never use them, ever. I think they are a slippery slope to temptation and foster the satisfaction of “immediacy” with either purchase gratification or problem-solving (as in your case with the cat). If you’ve got interest free you’ve made a sensible decision in my mind. I later managed to negotiate a 12-month interest-free period with another card and shifted my funds from high interest to no interest. The key really is to get it paid off before, or rather store the balance in savings until, the term runs out. I hope your cat is ok.

Thanks for your lovely comments on the photo, I’ve been in two minds whether to keep using photos or whether to set up a text-only template. Photos just seem to add some vibrance and colour to the page but it takes so much effort to find good ones that even remotely resonate with the topic sometimes.

I understand the slippery slope mindset. It’s very scary to be honest, but I like that it helps with our cash flow until we can get them both paid off. Both my husband and I are making efforts to work seasonal jobs over the holidays so we can pay it off. I think we’ll make it. Regarding the pictures, I’ve been thinking the same thing but I honestly love yours. You are very good at editing them and choosing vibrant photos! I would keep using photos if you continue to notice people repin them more.

You may be tempted to spend out of your budget range every now and then, but with self-discipline on your financial matters, theres no way that you cannot achieve your monetary goals. DISCIPLINE is the keyword.

It is, but I also think maintaining a realistic view of your budget and knowing the reasons why and what you are tempted to spend out of your budget on. Then factor those “needs” in as small goals so the journey doesn’t seem so hard.

Acknowledging that you are carrying too much debt and making the decision to become debt free can often be the hardest part of moving toward financial freedom. The path to attaining financial freedom is still paved with challenges, however.

Many people give up because it just seems too hard to change financial habits. If you’re on a low income, navigating your way out of debt can seem impossible.

I consider myself somewhat fortunate. I’m in a well-paid job. My debt to income ratio is not so fortunate, however. I’m facing a mountain of debt that I’m determined to conquer.

This is why I’m looking to create extra passive income revenue streams and I’m documenting my progress in this blog. By following along you can find ways to supplement your income streams and make extra income online.

Striving to become debt free

Over the last two years, I’ve managed to pull my finances under control. It wasn’t easy, but it was critical that I did it. I have learned so much over this time and I’ve had to radically cut expenses.

There have been times where I’ve cut my budget to extremes for periods of time. I was able to pay off a $5,000 credit card bill in just 6 weeks during one financial sprint.

During this time I’ve made mistakes and, on the most part, largely as a result of educating myself about personal finance, I’ve had successes that are progressing me toward a debt free lifestyle.

As you begin to educate yourself about personal finances it’s easy to start seeing other people around you that are making mistakes. I’d like to share with you the common mistakes that I see many people making when trying to become debt free.

Many of these I have experienced myself and so I offer advice on how to maintain your resolve to successfully navigate through the journey.

Before I get into these points I encourage you to sign up to my mailing list below and I will share with you a copy of my budget planner spreadsheet that I use each week on Google Docs.

This is the same spreadsheet that helped me pay off $5000 of debt in 6 weeks.

Want a free copy of my budget planner spreadsheet?

Enter your email to join my mailing list and I'll send you a link to the budget planner I use every week to keep track on my finances!

Here are the common debt repayment mistakes that people make in order to become debt free:

Not setting financial goals

It’s the first step you should take once you’ve set down a resolve to become debt free. This goal should be a monetary amount with a timeframe.

Once you’ve defined the goal, write it down!

Put this in a place where you see it every day. It will help you maintain your focus.

Not creating a plan

I started off without a financial plan. Without a plan things become stressful. You don’t know when you are on the right track and then you start to spend small amounts on little items that soon stack up.

I was, and still am, a stickler for buying a coffee in the morning. It’s a small expense each day but that $4.80 I spend on a coffee turns into $200 a month!

A plan helps you take your financial goal and break it into more manageable chunks that become easier to conquer. It also serves as a weekly roadmap for you to monitor your finances.

My financial plan consists of a financial budget spreadsheet.

Implementing a budget that encapsulated my financial goals was like the parting of the oceans for me. The clarity I obtained over my finances was incredible.

For the first time I knew where all my money was going and I was able to cut costs easily and move my money where I needed it to go. I’ve written about this already on my blog. Check out these posts if you are interested in learning more:

I now extend my budget spreadsheet over the next three years to form my financial plan.

Not setting yourself up for success using psychology

Once you’ve set a financial goal, formed a plan and used your budget to cut costs to become debt free, you’ll begin your journey. This is where it can get hard. You’re about to force yourself into changing your financial habits.

These habits may have been with you for a lifetime. Your new budget may dictate that you can’t have that coffee in the morning, or you can no longer eat out, maybe a date night with your husband or wife has been impacted – you can no longer afford a romantic meal at a restaurant and a movie, or a weekend away.

Changing these habits, particularly in the first few months may really test your resolve. As the early motivation and inspiration to attain debt freedom wanes and you begin to miss your creature comforts you’re likely to buckle.

That is, of course, unless you maintain the motivation by leveraging psychology.

In part, this is why I recommended writing down your goal and placing it where you can see it every day. It is also why I recommend you break your goal into manageable chunks and mini goals. It is also why I recommend, with my budget spreadsheet, that you track your finances, and progress, on a weekly basis.

You will more easily keep that fire burning as you see progress.

It is easier to maintain a resolve week to week when you remind yourself of the previous week’s achievement. Forget about the larger goal and focus on the smaller milestones which are more easily achieved.

If you falter this week and don’t achieve your mini goal for the week it’s easier to take corrective action the week later. It becomes easier to put yourself back on course.

The small wins stack up and you’ll continually feel a sense of achievement. As you achieve your weekly goals week upon week you’ll be less inclined to allow yourself to falter. The progress will enthuse you and drive you forward.

I talked in this post about goal setting. The post detailed a scientific study that was carried out on rats. The study found that rats worked more diligently on a task as they got closer to achieving the goal. They saw raised levels of dopamine in the brain as progress was made.

Dopamine is the body’s reward system, a chemical that makes you feel good. If you want to be debt free, these are the reactions that you want to encourage to set yourself up for success.

If you break your goal up and focus on hitting the mini weekly goals you’ll begin to experience the satisfaction that results from increased dopamine levels. This will spur you on. It’s the same psychological tactics that game developers use to keep you addicted to computer games like Candy Crush. As you “level up” you feel a sense of satisfaction and progress.

You’re going to gamify your way to debt freedom!

The best way of leveraging psychology, particularly if you hold multiple debts, is to utilize the debt snowball. The debt snowball is a highly motivating method of tackling debt. It will have you paying the smaller debts first so that you can see progress. I can attest, it works!

You can read more about the debt snowball here.

The key is to figure out what flicks your switches in being able to maintain your resolve.

When I first started on my budget I cut my costs to the extremes. As I found myself in shops weighing up purchase decisions I would make myself aware of my resolve. I would consider the negative impacts of a purchasing decision that was not in my budget.

Even simple things like buying a sandwich for lunch when I forgot to make a lunch at home. Often I would walk away. That evening I would remind myself that I’d saved myself some money, sometimes even a small amount. This saving would ensure I hit my goal that week. And, importantly, I would tell myself “well done”.

The true satisfaction came at the end of the week when I updated my budgets and weeks later when I hit a bigger milestone such as seeing a credit card completely paid off.

Adding to your debt

Sometimes you take your debt repayments to the extremes and don’t leave yourself room to actually live.

Setting a realistic budget is the key to avoiding this.

I fell into a different trap. After I paid off a $5000 credit card in 6 weeks I hit a combination of super motivation and frugality burnout. I’ll get to the latter point in a moment.

With the super motivation, I was itching to get into the next debt. But, I was living life so frugally I couldn’t possibly create more savings anywhere in my life.

I wanted to make a dent in the next credit card which was costing me over 20% per annum in interest. This was costing me about $90 a month in interest. I was prepared to experience short term pain for long term gain.

I wanted to avoid paying unnecessary interest as quickly as possible. I wanted to keep that money in my pocket.

What I did next was a big mistake.

I took my $1000 emergency fund that I’d worked so hard to build up and used it to pay off my credit card.

It seemed like a sound decision for about a week. Then I was hit by a trio of incidents that would have warranted access to my emergency fund.

My washing machine broke. I could have held out on getting that fixed, and I tried, but as laundry built up it needed fixing. In the same week, my car had major problems and then my son ended up in the hospital.

I had no choice but to use a credit card.

That was painful!

I felt like I was reverting back to ways I’d worked so hard to avoid. And I was.

Sometimes it’s an easy decision to make, to use debt to get by. Sometimes it’s unavoidable.

Good financial planning will see you putting aside money for an emergency fund and savings for bigger, long-term challenges.

But the insanity is I was paying off debt and using high-interest debt to cover the shortfall. All because I over extended my repayment efforts.

Now, I paid off a credit card with my emergency fund and then used a credit card for expenses that would have consumed my emergency fund anyway. Because I was strict with myself and limited the expenses I put back onto my card, the outcome would have been the same either way.

My saving grace was that I’d avoided using the credit card to pay for other expenses outside of those I would have paid for with my emergency fund.

For some, once the plastic has come out, it’s easy to fall back into habits.

When you consider the math behind what I did and really crunch the numbers, I actually did come out better off. This incident helped me come up with the counter-intuitive method to paying off a credit card.

Check out this post: The counter-intuitive method to paying off a credit card

The math is sound and it really works. But, I will warn you to know, if you use this method to tackle a credit card you need to be utterly diligent with your budgeting and ruthless in your cost-cutting strategies. It’s not a debt repayment method for the weak!

If you overextend yourself to pay off a low-cost loan such as a mortgage, and then use high-interest debt to cover a shortfall, you’re doing yourself a disservice. In fact, you’re entering into the realms of stupidity.

If you get into this habit you’ll start to slip and before you know it your credit card balance will be growing at a faster rate than you’re paying off debt. You’ll find yourself back in the debt cycle!

To avoid it, make sure your budget is realistic and stick to it! You should also keep an emergency fund and only use it for true emergencies. These two posts may be useful:

Taking frugality too far

I cut my living costs to the extreme. For six weeks, with the exception of when I had my son at the weekend, I lived on cheap but healthy food. When my son I made sure we had a more balanced plate.

I cut down on my portions and made sure I ate foods that would make me feel full. Eggs on toast, beans on toast, baked potato, salads were all the order of the day.

Meat and fish would often end up on the menu to preserve spending. I cut down on electricity and water usage. I made lunches for work.

I even cut out my morning coffee! (oh, my)

This, in and of itself, was not too hard. What became hard was I gave myself absolutely no money for minor treats.

I didn’t see friends for over eight weeks because I had no room in my budget to have a beer with workmates on a Friday. Not even just one beer.

When my partner wanted to go on a date to the movies, I declined. When friends invited me out for ice-cream in the city, I felt like I couldn’t go.

I cut myself too short and life became dull.

At the time I’d expected my financial goal to take me nine weeks. I achieved it in six; all by going to the extreme. I should have stuck to the nine-week plan and allowed myself some semblance of a life.

Six weeks is really not that long to make a few sacrifices. In fact, I’d both recommend it and do it again, particularly in light of the goal I achieved. It was momentous for me to clear that debt.

Where I went wrong after that was that I tried to maintain the momentum after I’d paid off the $5000 credit card. So focused and full of enthusiasm to be debt free I used my emergency fund and tried to continue with extreme frugality.

Taking frugality to the extreme can crush your soul, particularly when you can’t afford to socialize or buy one-off simple treats.

If you’re going to put yourself through a period of weeks or even months of cutting your costs to the absolute max then work in some rewards and ensure you have at least a little something to keep yourself sane each week.

Not cutting back enough

There’s a line between cutting back too much and shirking away from cutting back enough.

This is really a mistake I see more in others. I’ve tended to do well at making cutbacks in many areas. I’m not perfect, though. I’ve had occasions where I’ve considered I could cut back more. I’ve had my moments too where cutbacks have crept back into my life.

I’ve honestly found it difficult to hold the line on cutting costs when I’ve been stressed. This year has contained a great deal of stress for me. Work pressures amongst others have given me excuses to avoid sticking to my cutbacks on occasion.

I update my budget each weekend and I’ve had a few weekends this year where I’ve realized I’ve spent money in areas I vowed to make cuts. My coffee budget, which used to be my daily treat, would creep back into my morning routine.

Habits can be hard to break. It’s particularly hard when you experience stress because we tend to revert to our comforts to make us feel better. But it’s important to hold the line.

Your reminder of the importance of maintaining cutbacks sits in your financial goals and your budget. If you’re not hitting your budget and you have no way of making up the unintended expenses you need to have a stern conversation with yourself.

Monitoring and tracking your budget on a weekly basis helps you nip the “bad behavior” in the bud before it carries too much impact on your ultimate financial goal.

Not planning ahead

Another mistake I’ve tended to make was not planning for the future. As I began to live life on a tiny budget I didn’t plan enough for special events. My own birthday and Christmas were two that sprung to mind. That first Christmas under my new financial plan was extremely low key.

The following Christmas I planned well ahead of time. I shopped for my son throughout the year during toy sales and I joined a Christmas club to ensure we could do a decent food shop.

I was all ready for Christmas by the end of November. This year I already have a few toys put away for him. It’s an awesome feeling when you get so organized.

Planning for emergencies is also imperative. It’s so important to have an emergency fund put aside. Prioritize building up some savings too once you’re debt free.

What mistakes have you made paying off debt? Do you see other people making other mistakes? Let me know in the comments section below…

Original article and pictures take http://theextraincomeproject.com/debt-repayment-mistakes/ site

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