Debts are something that most Americans spend a whole lot of their time trying to fix. Fees will accrue every month and when you make that minimum payment it doesn’t help much. The expenses you pay toward the card makes a very small impact on the card and it takes you a whole lot of months to get anywhere. That means you’re missing out on something else when you have to make those payments. But why do we do it? Why do we stay in debt when we know how difficult it is?
The unfortunate thing about debt is that as many as 40% of people say they couldn’t come up with $400 for an unexpected expense. That means they don’t have $400 in any kind of liquid account and would have to borrow money from someone or sell something. This is according to the Economic Well-Being of U.S. Households, published by the Federal Reserve’s Report in 2017.
1. No Budget or Spending Pattern Records
If you don’t budget you’re going to have a hard time figuring out how to spend your money. You won’t be able to allocate any money that comes in on schedule or anything that comes in unexpectedly. What ends up happening from there, is that people have to use debt to get through the month. Not having cash on hand is no problem, because you can pull out a credit card. Not having a plan, however, means that you’re going to struggle to figure out how to pay back debts as well.
Monitor your finances to find out where you’re spending and how to save. You have to make sure that you don’t take on too much debt. You also want to think about what your goals are moving forward.
Track what you’re doing with your money to know what’s happening with your financial situation. Also, track your goals and your spending. Whether you use an app on your phone, a notebook and pen or a spreadsheet, you want to keep everything written down.
2. No Knowledge of Finance
Many people struggle with debt because they just don’t understand finance. They don’t know how to make the decisions that it takes to advance their finances. As a result, they end up using their credit cards too much or they take out loans that have high-interest rates. They’re completely unaware of things like:
The Snowball Method
To use this technique you start with the credit card you have with the smallest balance, and then you pay it off. Once you’ve done that you switch the money to the next smallest balance account.
So, you take that smallest balance and you pay as much extra money as you possibly can to that account. Make sure you still make at least minimum payments toward the other cards. Missing payments will only make things worse.
Now, once you’ve paid off that first card entirely you start the next one. It should be the new card with the lowest balance. You now put all of the money you have extra toward that balance. With this method, you’re going to pay off your cards earlier than you would otherwise. It also gives you more motivation as you see the cards dropping quickly.
The Avalanche Method
Here you’re going to start with the debt on the card with the highest interest rate.
When you make a payment to a credit card company you’re paying them a lot in interest. If you can cut down on that interest you’re going to cut down on how long you’re in debt and how much you pay. If you want to pay things off fast you’ll want to pay this way.
Pay as much as you can onto this card and still pay the minimum for the other cards. You’ll need to stay very focused and self-motivated for this method. You won’t see as big of a difference in your debt as quickly with this option.
For this version, as soon as you finish paying off the first card you go to the next one with the highest interest rate. You will continue this, again and again, to pay off everything you have.
You don’t have to pick one or the other. You get to decide which one works for you. You can even choose a slightly combined approach if you want to. The key is to pick one that you can stick to.
3. Don’t Want to Make Sacrifices
If you don’t want to make sacrifices you’re going to have a hard time paying debt. The more sacrifices you’re willing to make the faster you can pay your debt off. Know that instant gratification may feel great, but it’s not going to happen all the time.
We live in a world that says we can have whatever we want, whenever we want it. Spending more and saving less is the norm. But changing that is crucial to being able to pay off the debt.
4. Money Doesn’t Help Those in Debt
It’s impossible to invest if you don’t have money. Even still, you need a way to make your money work for you. That means you must save some of your money and invest it to make more money.
High yield savings accounts, stocks, real estate and more are important ways to make some more money. They give you the opportunity to invest and make more money for yourself. Then you don’t have to do anything.
5. No Second Source of Income
Most people have a single form of income that they base everything off of.
If you get too much debt that means you end up paying far too much each month. You end up paying toward interest and fees, which makes it difficult to pay down the debt. Plus, you have a lot of different expenses each month. You have to pay rent, insurance, childcare and utilities and that doesn’t leave a lot of extra.
The most important thing is to have some type of side hustle to help you pay down the debt. It’s going to give you a little extra money every month to put toward your debt. From there, you can even build up a full business, which gives you an even better side amount to put toward your debt.
6. Too High Mortgage
A mortgage that’s too high can become an anchor easily.
Often, banks will approve someone for a very large mortgage. Then, they want to charge you a whole lot of interest on top of it. Keep in mind that the larger the loan the more you’ll pay every month. If you decide to go too far with the expense you may be in trouble. That means if there’s any kind of problem in your future you could end up overwhelmed.
Pay attention to your mortgage and if it’s too much look for a way to downsize. You may be able to get a smaller house, rent a place or get a roommate to help you out. Take a look at a mortgage calculator for an estimate on what you can afford.
7. Maxing Your Cards And Only Paying the Smallest Amount
The first problem is that many people max out their credit cards. From there, it becomes difficult to pay off the balance. You also don’t have a plan for unexpected expenses. You could be in trouble when you have to pay for those things.
On top of that, you’re going to increase your credit utilization score. That’s going to mean a lower credit score overall. It’s also going to mean a whole lot of additional problems when you try to use that credit score for anything else in the future.
From there, if you only make the minimum payment you are going to be stuck in debt. If you owe $10,000 and have a 17.5% interest rate and only have to pay 2.5% of the minimum that means $250. But it will take you over 5 years to pay off the $10,000. Plus, that means you have to keep from adding new debt to the amount that you owe while you’re at it. That’s going to make it extremely difficult to achieve anything.
8. Being Underemployed or Unemployed
Many people lose jobs and this causes them to fall into debt. For those who find themselves in debt while working, losing a job can be a catastrophe. It becomes nearly impossible to make the same payments on debt. Not only that, there are generally new expenses that need to be paid. This means more interest and fees continue to be tacked on. While you’re trying to get a new job, you find yourself struggling to pay off those cards or even pay them down. Even if you can find another job you find that you have much higher credit card balances.
If you are underemployed you may also find yourself struggling. If you have a small paycheck or few hours you may not be able to pay more than the minimum.
If that happens you start to depend on your credit cards. This helps to push you through until you get more money. On the other hand, it increases your balance dramatically. The problem with that is you end up in debt even longer. You struggle to make the payments that you need just to stay afloat, let alone actually get ahead.
9. Paying Late
When you make a late payment you get charged a fee. That fee seems small at the moment, but it only gets larger. If you’re late multiple times you can end up with even larger fees and interest rates. They also continue to add up over time. If you get a higher interest rate as a result of that late payment that only makes it worse. When you think about the fact that you could have multiple late cards at once you end up even worse. For example, you could have up to $37 per card for a single late month. That could mean hundreds of dollars in added charges.
If you weren’t paying your credit cards late you would be able to use that extra money to pay something down.
That means you could end up falling behind and you could have some struggles in the end. So, what are you going to do? How are you going to fix your debt and fix the common mistakes that so many people are making about their debt?
If you struggle to make your payment on time you should make sure you use automatic payments. This can make sure everything is paid on time and you won’t be struggling with late fees.