Are you trying to pay off your debt? I’m planning on finally eradicating all of my non-mortgage debt this year.
I’ve written before how I completely derailed my get out of debt train at one point. It was silly of me and could have been avoided. In my experience, most credit card debt can be avoided.
Even when my wife and I had a much lower income, we could have (and should have) avoided credit card debt. Unfortunately, we weren’t really great at managing our money. We used to go out to eat a couple of times a week. We’d buy movies and video games when we didn’t really have much money. We bought bigger purchases, like a new TV, video game systems, and a camera, with financing options rather than paying for it outright.
Based on the items we purchased that I listed above, you can probably guess who the culprit of most of this was (me!).
There are a lot of different ways to help get out of debt faster. But there are also ways to go into more debt if you’re not careful. Consider this post like learning from someone else’s mistakes. All five of these have happened to me (facepalm).
Here are the five quickest ways you can go back into debt.
Not Looking at Your Finances Enough
Whenever you neglect something, you tend to lose track of it. If you don’t tend to your relationships, you can grow apart. Not watching your food intake can make your weight get away from you (or add to you!).
Finances are the same way. If you don’t spend enough time with them, it makes it hard to keep track of what you’ve spent.
There have been times where I let time get away from me and I don’t realize that I haven’t looked at my finances in three weeks. Then, I take a look at my wallet and realize that I have like 15 receipts to put in, and probably a few electronic receipts.
Almost every time I neglect my financial tracking, there are always expenses I miss or lose. It doesn’t give me a great picture of my money. If my budgeting app says I have $30 to spend on our eating out budget, it may not actually be $30 because I have $20 worth of receipts in my wallet.
Neglecting your finances leads to unintentionally overspending. This isn’t good for your debt, especially if things are already tight. If you go over budget by $50 and don’t have the funds to cover it, that $50 has to come from somewhere. The easiest place is to add it to a credit card. Overspending can easily lead to more debt.
It’s important to make sure you spend enough time on your finances. Depending on your spending habits, you’ll at least want to make sure you spend enough time to record your finances. That brings me to my next point…
Not Tracking Your Finances
Plain and simple, when you are trying to pay off your debt, you need to keep track of your finances. If you don’t keep track of your finances, there is no way to tell how much you are spending on your budget or how much you should be putting toward debt.
If you make a $300 payment toward your credit card, have $300 leftover for the month, but forget you have $400 worth of expenses, that $100 either goes right back on the credit card or your bank balance goes negative. Either way, you’re losing money.
After we paid off $26,000 in 11 months, I stopped keeping so tight a hold on our finances. I wouldn’t care how much we would spend on things. We overspent on all of our discretionary budgets.
Part of this was an experiment as I was curious what would happen and what it felt like. Most of it was just feeling good because I had spent the past 11 months being very strict with my budget. It was almost like taking a long rest after a race.
I did have some regret after that, though. We overspent probably about $1,000 over the course of a couple of months. That $1,000 could have gone toward some of the debt that we have remaining. I should have been tracking my finances.
Tracking your finances will give you an accurate picture of how much you can spend everywhere, including on your debt. It allows you to accurately plan and make sure everything is taken care of so you don’t have to go into more debt.
I’m still on the fence on whether rewards credit cards are worth it or not. Dave Ramsey is convinced that there is no such thing as responsible use of credit cards. I disagree, but I see where his concern comes from.
It is very easy to abuse a reward credit card. If you are not disciplined enough, you may be tempted to overspend simply to get more rewards.
I did this a little bit at the start. Luckily, I quickly realized that I was starting to spend a little bit more on things because I wanted to get more cash back. I had to quickly change my thinking.
Instead, only spend money on a credit card that you would have spent without it. Examples of this would be bills that you have to pay every month, groceries, gas, things like that. Don’t spend money on a credit card if you aren’t planning on spending the money anyway.
Just because a credit card company will “reward” you doesn’t mean you now have a license to go on a shopping spree.
Raise your hand if you’ve never overspent before. Yeah…I don’t know that there’s anyone who hasn’t. Overspending from time to time isn’t terribly damaging when it’s done every once in a while and you can handle the extra expense.
But that’s where it gets you.
If you overspend, it’s easy to think “Oh, this is just one time. It won’t be a big deal.” How many times has it been “just one time?”
Overspending habitually can lead to a lot of debt. If you’re really swayed by deals at a clothing store, you may be spending money you didn’t need to spend or don’t have.
Habits are things or actions that we do that are like second nature to us. It requires very little thinking on our part. That’s why it’s so important to create good habits—and so hard to break bad ones. If you’re habitually overspending, you may not even realize it until you notice your credit card bills piling up or your debt payoff plan is derailed.
Instead, create a budget that works for you (LINK) and stick with it. Learning to budget in a way that’s right for you is one of the keys to curb overspending, as well as keeping up with our debt payoff plan.
Have a truly unexpected expense
The emphasis on “truly” is no accident. In order to figure out what an actual unexpected expense is, we have to redefine what an expected expense is.
Things like car repairs, home repairs, and even some medical expenses all should be more or less expected. Cars eventually break down. Homes require maintenance and upkeep. Everyone gets sick.
If you hurt yourself and go to the emergency room and have an extra $600 expense, that sort of thing can be planned for. The same can be said of homes and cars. If you buy a home and your water heater is older than the expected life, the chances are you’re going to have to replace it relatively soon. Start planning for it now.
A true unexpected expense is something like having a loved one pass away and not have enough life insurance to cover funeral expenses or getting hurt and maxing out your medical insurance. Job loss could also be considered an unexpected “expense” even though emergency funds help with that.
Instead, actually have an emergency fund. If you’re looking to pay off debt first, have an emergency fund the size that you are comfortable with. It is recommended (by myself as well) to keep $1,000 in your bank for emergencies. If you need more to feel comfortable, put more in savings.
Another thing you can do is plan for the unexpected expenses that should be expected. Put a little money aside each month for car or home repairs, extra medical expenses, and non-monthly expenses instead of trying to come up with the money when you the expense occurs.
You know it’s coming so plan for it now.
The average amount of balance-carrying household credit card debt has hovered between $14,000 and $16,000 over the past 10 years. While there are many things that are in play to make that amount of debt stick around, I believe much of the problem we can fix ourselves.
All of the above five ways to dive deeper into debt I’ve done—and it stinks. I encourage you to learn from my mistakes. One of the best ways to learn is from someone else’s mistakes.
If we can control these five things as well as lifestyle inflation, I believe much of the credit card debt in this country can be greatly reduced. However, the increases in the cost of living and the relatively low amount of wage increase cannot be discounted as reasons for some of the debt.
The best thing we can do is to try and reduce our own debt! Removing our debt from the pictures assures us that we can handle almost any situation our financial life will throw at us.
Thoughts? Let me know!
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