What Not to Do When Paying Off Debt

Paying off debt isn’t fun for anyone. Whether it’s student loans, personal loans, credit card debt, medical debt— or a combination of them — it seems like everyone is trying to figure out how to pay off debt fast. The answers can be confusing. What’s the best way to pay off credit card debt? Is it a good idea to take out personal loans to pay off debt? 

Remember, having debt isn’t a failing; it’s common. But having a plan for paying off debt is the best strategy, no matter how you got into it in the first place. When it comes to paying off debt, what you don’t do is just as important as what you do. So, here are some mistakes to avoid while you’re paying off debt — and how to plan along the way.

As you’re building a solid financial future, reach out to Farm Bureau to connect with an advisor that can help you create a payment strategy that works for you.

Mistake #1: Forgoing a Plan

The first step to paying off debt is knowing how much debt you’re carrying and to whom you owe by making a complete list of all your debts, noting each account’s balance, status, and interest rates. While this process can feel intimidating, it’s essential for creating an effective pay-off strategy and serves as the framework through which you can track your progress. 

After compiling the information, rank your debts by interest rate (from highest to lowest) and by balance size, then you can decide which one to focus on first and begin paying it down. There are two debt payment strategies that could work for you: 

• Snowball method: Paying off the smallest debt first, which feels motivating, then take the amount you were paying into that debt and put it toward the next smallest debt.
• Avalanche method: Target the highest-interest debt first, which will save you money in the long run. 

Mistake #2: Paying Only the Minimum

Unless your plan involves paying off a single debt at once while slowly chipping away at the others, then making minimum payments doesn’t get you much further along the road to being debt-free. You’re almost entirely paying only interest to creditors, rather than paying down the principal balance. Don’t make this mistake when you’re thinking about how to manage your debt; instead, try to pay extra toward each payment.

Mistake #3: Continuing to Make Credit Card Charges

Racking up charges on your credit card that you don’t pay off immediately while trying to pay your debt zeros out any progress you’ve made. In fact, continuing to use your credit card could grow your debt if you’re not paying more toward the balance than what you’re spending. Avoid this mistake by spending only what you can afford and paying the balance each month.

Mistake #4: Borrowing From Your 401(k)

Remember the reason that you’re contributing to your 401(k): to build a sound financial future for yourself. When you dip into these funds, not only are you undoing your contributions to this important goal, but you’re also paying for it — literally.

You’ll have to pay the loan back with interest, and the money you use to pay that interest is subject to double taxation if you borrow from your 401(k)¹. That’s because you pay back the loan using post-tax dollars, and you’ll be taxed again when you take the distributions. 

Mistake #5: Skipping Out on Saving for Emergencies

As you put as much money as you can toward your debt, it may seem counterintuitive to also set aside funds for emergencies. Shouldn’t all your money go to paying down debt? In theory, yes. But having access to savings, however small, can keep you from going deeper into debt when unexpected expenses pop up. So, put a bit aside in an emergency fund, too.

Mistake #6: Ignoring the Power of Part-Time Work

Generating additional income that can be used to pay off debts can greatly speed up the process. Think outside of the box when you brainstorm money-making ventures. Perhaps you can work overtime at your current job, start a side hustle, host yard sales, sell your old clothes online or even rent out a room in your house. Evaluate your skills and interests, then consider how you can best monetize them. 

Mistake #7: Not Tracking Expenses

Tracking how much you spend, and on what, sounds like a tedious task. But it also gives you key insights into your spending habits. A $3 coffee might not seem like a big expense, but this daily purchase over the course of a month adds up to nearly $100 — a significant chunk of change that could otherwise go to a credit card bill or a car loan. 

Every dollar you spend on an unnecessary purchase is a dollar that can be put toward becoming debt-free. This daily habit will help put into perspective where your spending is going and help you create a plan to cut back on some areas. Try out a budgeting app to make the process a little less onerous.

Get the Support You Need

Becoming debt-free may seem like an impossible feat, but you don’t have to go at it alone. Reach out to Farm Bureau today to discuss how to pay off debt and manage your financial future.