Personal finance experts share their best ideas on avoiding debt mistakes and changing your money mindset
Whether you want to or not, it’s likely you’re going to be in debt at least some point in your life. Shopping is too much fun and there are some good uses of debt that actually make sense.
That doesn’t mean you have to fall into the debt trap that forces nearly 1.5 million Americans into bankruptcy each year.
Avoiding the debt trap is a matter of understanding credit and the mistakes we all make when it comes to borrowing beyond our means.
That’s why I reached out to 15 personal finance experts to get their top tips on paying off debt and avoiding the worst debt mistakes.
Biggest Mistakes People Making before Getting into Debt
Wouldn’t it be great if you could avoid getting in debt in the first place?
It’s a nice thought but not always easy when credit is so easily available. Avoiding falling into the debt trap means using a few tricks to change your money mindset.
Elle of Couple Money hits the problem directly with impatience and the ease of getting something now.
From firsthand experience and hearing from other couples, I know how impatience makes debt seem reasonable. You move to your first apartment and you want and there's this temptation to set everything up right then.
Tying yourself up in debt is not the best move. Cash flowing purchases one at a time can help you get what you're looking for without the debt. It also gives you more time, which you can use to shop around, see if you're getting the best deal, and discovering if you truly want something or it was just an impulse to buy.
Here's a wake-up call for anyone with credit cards burning a hole in their pocket. Use this credit card payoff calculator to estimate how much money you're losing to interest every month.
Jillian of Montana Money Adventures has a great strategy for dealing with impatience and testing to see how much of a burden the new debt payments will be.
One of the biggest mistakes I see people make is taking out new payments for things without ‘testing the payment’ first.
If buying something on credit is going to mean a payment of $400 a month, try saving that amount for a couple of months before making the purchase. You’ll get a feel for how the payment will affect your monthly budget and may just be able to talk yourself out of it.
In so many cases, people just hope it won't be a burden. By testing the payment before you commit, not only can you be more confident in your budget, but you can apply that savings towards your new item.
Whitney Hansen offers some simple math that might be enough to shock you into rethinking debt.
The biggest debt mistake people make is failure to prioritize paying it off. We buy into the idea that if you can afford the payments, you can afford it. You've got to run the numbers to see what could happen if you invested that payment.
For example, that $200 payment over the course of 48 months at a 7% interest rate compounds to just over $11,000. The math gets shocking. It's not about the payment. It's about the opportunity cost of not investing that money instead.
Canadian Budget Binder warns readers against creating debt in the first place.
We tend to pull our strings too tight financially. If you create debt, start using a budget and track your expenses to provide yourself to make it easier to pay off your debt faster.
Don’t Be Scared of Debt
I’m going to say something controversial…
Getting in debt is OK.
Shopping is fun and sometimes income doesn’t match up with stuff you need…or even little things you want. Using credit is ok if you confront it and have a plan before it destroys your financial life.
Of course, it's not so easy to control your debt before it controls you. The average household debt is over $52,500 and people in 13 states owe more than they make in a year!
Tracie, the Penny Pinchin Mom shares how ‘owning’ your debt can help understand your money attitude for payoff success.
I find that one mistake many people in debt make is not accepting it.
Whether your debt is a result of your own poor financial mistakes or unfortunate circumstances, it is yours. You own it and you need to take responsibility for it. The moment you can do that, then you can start the steps necessary to get out of debt.
The number one mistake though is that people don't know their money attitude. They do not take time to get to the root of why they are in debt and change that. There is psychology tied to money and you need to understand your money attitude before you can ever change the way you handle money. Otherwise, you will get out of debt and will make the same mistakes time and time again.
Confronting your debt and how you got in the situation means making a plan and sticking to it.
Planning Your Debt Payoff to Avoid these Mistakes
So, you’re in debt and you’re ready to confront it. Making a plan to pay off your debt isn’t enough, it has to be a plan you can stick to and allows some wiggle-room for when challenges appear.
Amanda of Centsibly Rich gets us started with putting together a solid plan.
One of the biggest mistakes people in debt make is to not have a solid plan for repayment. Making minimum payments won't get you there (particularly with credit card debt) and continuing to add to existing debt will only dig you deeper.
Developing a plan begins with knowing exactly how much you owe and how much you spend. Armed with this information, you can formulate a plan to cut spending, decide which debt to pay first, and accelerate debt repayment.
Seeing how much you can save by paying off your debt can be a huge motivation to get started. I developed this simple loan payoff calculator to help you estimate how much you can save by consolidating your debt or adding to your payments.
Your first stop in making a debt payoff plan is probably going to be your favorite financial blog or a Google search. That’s fine and there are a lot of great debt strategies out there. Kayla Sloan reminds readers to get a second opinion on any strategies or advice you hear.
The biggest mistake I see and hear about is people taking bad or wrong money advice from well-meaning friends, family, or co-workers. Instead of taking people at their word, find out for yourself from a financial expert.
Call and ask questions. Look online. Do you own research. This way you can make truly informed financial decisions.
Hack Your Debt Payoff with Multiple Payments
Being committed to paying off your debt means going beyond regular payments. Sure, making the minimum payments will pay down your debt gradually but will cost thousands in interest.
To Elaina of Conquer Your Debt making only the minimum payments is the biggest debt problem people get into.
By doing so, you're essentially guaranteeing that it's going to take you years to pay off the debt. And the larger the balance, the longer it will take.
Making only minimum payments also leads to paying more in interest charges. The longer you're making payments, the more interest you'll pay.
Melanie of Dear Debt offers a debt payoff hack that not only pays off the amount faster but saves in interest.
Making bi-weekly or weekly payments can easily cut down on interest and help you get out of debt faster. People just stick to the monthly payment they're given, but making more frequent payments — not necessarily paying more money (though that helps, too!) — can help pay off debt and lower the amount you pay in interest.
Adding just $15 a month to a mortgage payment can save you thousands of dollars in interest but just switching to paying twice a month, making the same payment, can save four years of payments!
Beating Setbacks in Debt Payoff
Sticking with a plan and paying off debt is rarely easy. There will be setbacks and knowing how to get back on track could mean the difference between debt-free and falling back into the debt trap.
Kathleen of Stacking Benjamins recommends avoiding the ‘all-or-nothing’ mindset that leads to failure.
The biggest mistake I see people make when getting out of debt is the ‘all or nothing’ mentality, like when someone on a diet eats a cookie and says to themselves, “well, I ate one cookie, so I might as well eat two dozen more.”
So too for the people working hard toward their debt goals. They chip away at debt a couple dollars at a time, and see some progress. Then, something unexpected comes up and they didn't have enough in their emergency fund, so they put it on a credit card… and fell back into bad habits instead of seeing this as a minor setback.
Femme Frugality shares one of the worst debt mistakes you can make and how to overcome your fear of debt.
The biggest debt mistake I see people making is burying their head in the sand. Looking at your numbers can be scary, but that's all the more reason to be aware of them.
When you ignore your total debt load, you remain oblivious to bad spending patterns. You also can't build an effective plan to change your financial situation. In order to do either of these things, you need to look your numbers square in the face. It will be intimidating, but always remember that you are stronger than your debt.
Having a solid emergency fund is crucial to not falling back into debt. Roger of Captain401 recommends taking care of your short-term expenses with savings.
Paying off your debt before you have a solid emergency fund is a risky endeavor. You may feel strongly that you should pay down your loans as aggressively as you can, but remember to think about your short-term needs as well.
An unexpected expense in the next few months could build up even more debt if you don't have some easy-to-access funds on reserve. It may be tough to find the cash, but make this a priority and put aside even a few dollars when you can for the “life happens” emergency fund.
Thinking Long-Term with Your Debt Payoff Strategy
Get caught up in a short-term thinking though and you might have trouble thinking long-term. Don’t forget to think about your long-term goals and how they are affected by debt and your debt payoff strategy.
Matt of Distilled Dollar warns readers to balance their debt payoff with longer-term financial needs like investing.
The biggest mistake I frequently see is people being too focused on their debt to the detriment of their investing goals. Unless you have debt with a high interest rate, then the fiscally savvy move is to invest while paying down debt.
With stocks paying an average dividend of 2%, my return on equity needs only to be a few percent more to compete with low-rate debt. The common mistake here is people pay down tax efficient debt, mortgages and student loans, in a tax inefficient manner. The alternative approach I've used is maintain the minimum payments and invest the excess.
Here's a quick 5% example: An extra $1,000 to pay off student loans means you'll save $50 on interest. If you put that same income into your 401(k) on a pretax basis, that $1000 is actually ~$1,300 if you’re in the 25% bracket. You get instant savings on taxes and a return that will compound over the years.
Alexis of Fitnancials took the long-term view when paying for college and taking out student loans.
Many students take out the maximum amount of loans and use the leftover money for things they don't need. Not only that, students don't realize how much a $20,000 loan can amount to 10 years later when they're trying to pay it off.
I only took out the exact amount that I needed to, and some semesters were even a little short, so I ended up paying out of pocket, but this meant that I strictly only took out what was necessary.
Understand How Debt Affects Your Life
Sometimes it’s only by being in debt that you see how it affects your life but that may be the kick in the butt you need to confront it and get back on track.
Financial Panther recommends getting to this realization as early as possible, to take advantage of paying off your debt early.
One of the biggest debt mistakes I see people make is just letting their debt hang around instead of buckling down and taking care of it right away. One of the nice things about taking care of your debt right away is that it makes life easier.
I've often said that I think your 20s are the best time to pay off our debt. Most people won't have families yet by then, so the responsibilities will be fewer. There won't be a ton of expectation to live a certain type of lifestyle, making it easier to live modestly without people thinking that you're missing out.
When you pay off your debt right away, you give yourself much more flexibility in how you live your life in the future.
Everyone makes debt mistakes every once in a while. Whether it’s mistakes budgeting or with debt payoff strategies or just with getting into too much debt in the first place. That doesn’t mean your financial life is ruined. Getting back on track to meet your financial goals means getting help where you need it and ditching your debt for good.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.