Top 5 Mistakes to Avoid When Trying to Get Out of Debt

Money doesn’t grow on trees. As such, you can be forced to get into debt to fund an investment, deal with an emergency, purchase a big purchase item, and so on.  But getting out of debt can be daunting.

You have to change your spending habits, learn how to create a budget, prioritise which debts to pay, track your expenses, build an emergency account, and improve your financial literacy. It’s a detailed process and there are pitfalls that you’ll want to avoid.

Not only can these mistakes get you further in debt, but even after paying your debt, you could find yourself back in the same boat. 

So, as you begin your debt repayment journey, watch out for these common mistakes to avoid.

1. Failing to Make a Debt Repayment Plan

“An hour of planning can save you 10 hours of doing” Dale Carnegie

Coping with debt can be overwhelming. But you can achieve debt-free living if you have a plan. 

A debt repayment plan can give you more control over your finances. It will also help you stick to your goals.

To create a debt repayment plan,  list all your debts, noting each amount and the interest you pay.

Secondly, consider a suitable method for clearing the debt. The most common approaches are:

Snowball method

The debt snowball method is a debt repayment strategy where you pay off your debts starting with the smallest to the largest. When you pay off the first debt, you roll the minimum payment you were making towards that debt to the next smallest debt.

Here’s how it works:

• Step 1: List all your debt from smallest to largest. Disregard the interest rate on each
• Step 2: Pay the minimum monthly payments on all your debts.
• Step 3: Pay all the extra money you have towards your small debt. 
• Step 4: Repeat until you clear all your debt.

Avalanche method

The avalanche method focuses on paying the debt with the highest interest rate. The less interest you pay the more you can put toward paying the principal amount.

Here’s how the debt avalanche method works:

• Step 1: List all your debts.
• Step 2: Arrange the list with the highest interest rate first
• Step 3: Paying the debt with the highest interest first while only paying the minimum on the other debts.
• Step 4: Repeat the process until your debt is gone.

Choose a method you’re comfortable with and stick with it. That said, it will take time before clearing debt using either method. Be patient and celebrate your small wins as you clear one debt at a time.

Read Also: 5 Tips to Mastering the Art of Debt-Free Living

2. Not Budgeting

Your debt repayment plan can’t succeed if you don’t change your spending habits. To help you keep your expenses under control, create a budget.

Budgeting is not everyone’s cup of tea. Even so, it’s a skill that can be honed. A popular budgeting method is the 50/30/20 rule.

The 50/30/20 rule divides your after-tax income into three categories; needs, wants, and savings or debt. 

Here is how to use it:

1. List down your monthly income to know how much you have to work with.
2. List all your fixed and variable monthly expenses.
3. Categorize the expenses into needs, wants, and savings/debt.
4. Allocate 50% of your income to your needs, 30% to your wants, and 20% to your savings/debt.
5. Reduce your non-essential expenses to get money to pay off your debt.

Even minor cuts to your expenditures can add up fast. For instance, if you can stop paying a Ksh5000 TV subscription and start relying on the internet for news and entertainment, after 12 months, you would have Ksh60,000 to put towards your debts.

You can try other types of budgets. The bottom line is a budget allows you to track your income and expenses, live below your means and manage your debt.

Read Also: Testing 50/30/20 Budgeting Rule With My Ksh50K Salary

3. Not Increasing Your Income 

Paying off debt and avoiding getting back into it goes beyond budgeting alone. You also need extra income to support your lifestyle while dealing with your debt. As such, increasing your income can boost your debt repayment efforts.

You can increase your income by turning your savings into investments, getting a side gig, or picking up extra hours at work. But whatever you pick, increasing your sources of income means you’ll pay your debts faster and you’re less likely to slide back into debt later

For example, if you could earn an extra Ksh10,000 per month, in 10 months, you’ll be able to pay off an additional Ksh100,000 of debt.

Read Also: 8 Ideas to Create Multiple Sources of Income

4. Not Having an Emergency Fund

“ Save 3-6 months of expenses in a rainy day fund. Know why? Cause it’s going to rain, and you aren’t the exception.’’ Dave Ramsey.

Life tends to make twists and turns. The worst can happen when you least expect it.

You also don’t want to borrow more money to cover an emergency when you’re already languishing in debt. It’s thus critical that you have money stashed away to cover emergencies like funeral costs or hospital bills.

So, put 3-6 months of your expenses in an emergency fund. Although it might take time, always include it in your budget. This way, you won’t fall further into debt or use your savings when a crisis emerges.

Read Also: 6 Consequences of Not Having an Emergency Fund

5. Failing to Improve Your Financial Literacy

Struggling with debt is not just about a lack of self-control. Financial literacy is also important. When you’re financially literate, you can effectively manage your finances.

The goal of financial literacy is to teach you how to earn, save, spend, borrow,  and protect your money. Besides, being  financially literate can help you avoid more pitfalls such as:

• Accumulating unsustainable debt burdens.
• Developing poor spending habits.
• Not meeting your financial goals. 

For instance, if you understand the effects of compounding interest, you’re less likely to engage in high-cost borrowing. 

So, how can you improve your financial literacy? You can:

• Subscribe to financial newsletters.
• Study personal finance books.
• Listen to personal finance podcasts.
• Follow finance experts on social media.
• Create a budget.
• Talk to finance professionals.

Read Also: 9 Financial Topics You Need an Understanding Of

Wrapping Up

It’s easy to make mistakes when paying off debt especially if you don’t have a plan. However, by avoiding these pitfalls,  you can pay off your debt faster and avoid unsustainable debt in the future. 

So, start budgeting, increase your sources of income,  create an emergency fund and improve your financial literacy. This way, you’ll never spiral into debt again.