Having a plan for debt reduction is the correct strategy. But it shouldn’t be undermined by any of these faults…
One of the most important mistakes any individual or family can make when they decide to eliminate their debt is to forget to include a step to change their spending habits immediately and drastically. I recommend taking a drastic step because it is symbolic. It shows you and your family that things really are about to change for the better. Debt.org reports:
People are creatures of habits and spending money is no exception. We shop at the same stores, eat in the same restaurants and drive the same car, because it’s comfortable. It’s also costing you more than you can handle financially. Remedy: If you won’t change your spending habits, you won’t ever get out of debt. Start with your morning habits (have your coffee and breakfast at home). Go to lunch with a brown bag, not a wallet. In the evening, watch games or movies on TV, while eating a home cooked meal. You will see an immediate impact on your daily spending habits. You don’t have to do without. You just have to make better choices with what you do.
Committing to taking your own lunch to work is one practical solution that can save a family hundreds of dollars per month. I can personally attest to this. Before I was married, I would spend $12 a day, 5 days a week, eating “fast food” for lunch (ham & Swiss sandwiches have gotten expensive). That’s $60 per week, and almost $250 per month. To get serious about cutting my expenses, I acted drastically: I bought five plastic food storage containers for about $5. I then prepared a bulk meal on Sunday evening, distributed it across the five containers, and ate it five days a week. I switched to drinking water for lunch exclusively. This drastic action cut my weekly lunch bill to about $15, which saved me $190 per month, or over $2,000 a year.
And it’s also a habit that stuck with me permanently. It was a positive, permanent change that altered our family budget for the better. It altered our attitudes and our diets for the better, too.
This kind of permanent lifestyle change frees up money that can be put towards
- building an emergency fund
- increasing savings
- saving for a rental house, or
- saving for a family house or a wedding.
Another major mistake: signing up for a debt-relief program. These come in two forms. Dave Ramsey explains them:
Basically, a debt reduction service promises (for a fee) to help clean up your debt mess by working with your creditors. Usually, those promises come in one of two forms: debt settlement and debt consolidation.
Debt settlement companies take the money you pay them and use it to negotiate with your creditors to reduce or eliminate what you owe. The problem is, they charge way more than you would pay if you just settled the debts on your own.
Debt consolidation companies combine all your debts into one single debt—usually at a lower interest rate. That sounds good on the surface, but they don’t really get rid of your debts. They just move them from one place to another.
The key thing to remember in both cases is that you really don’t need to pay someone else to do what you can do yourself. Believe it or not, you actually have the power to call your creditors and negotiate.
Instead of hiring what are effectively debt reduction service “consultants,” church members should be able to come to the diaconate and request their assistance without charge.
One big problem with debt consolidation is that you pay money to get a smaller payment. An indebted individual may pay no money today, but they will pay through the nose in the future through extra interest and a longer pay-back period.
This isn’t to say that debt consolidation is a bad strategy. Consolidating multiple high-interest debts into a single lower-interest loan can make sense, but it needs to be built into the strategy. It is likely simpler and easier to use the debt snowball method to start conquering debts one at a time.
One final mistake to avoid: not setting a workable budget.
It is difficult, if not impossible to gain control of your finances unless you have a budget. People think it’s too much work … until they get $20,000 in credit card debt and wonder how in the world that happened! Remedy: Develop a realistic budget that addresses financial needs like housing, food, health care, insurance and education, but still creates room to make payments on debt. Put away the credit cards and only pay with cash. That might mean reducing (or eliminating) things like dining out, entertainment, shopping for new clothes, cars or electronics, but if you’re serious about eliminating debt, operating with a budget and paying cash is a great start.
For more mistakes to avoid when paying off debt, click the link to read the full article:
Creating a plan is the first step in eliminating debt. It is also crucial to challenge it for flaws. The mistakes I listed in this article are fatal flaws deacons should help their members avoid.