Mistakes That Could Hamper Your Battle With Debt
Carrying too much debt can be like a monkey on your back - hard to get out from under
. The fact is though, that reducing or eliminating debt is actually pretty simple and straightforward. But you need to be smart about addressing the reasons you find yourself in debt in the first place. The decisions you make now can affect your finances for years to come. Here's some common mistakes to keep in mind:
Focusing on the Wrong Debt
Some people mistakenly believe that they should pay off their mortgage first because it is an "investment" that steadily appreciates. This is only a good choice if you have already paid off higher interest rate debt and have adequate emergency funds. With low interest rates and tax deductibility, this is often the last debt you want to retire.
Limiting Your Options
Sometimes people facing large debt decide to double up on payments to expedite the payoff. This can actually sabotage your efforts if an unexpected financial crisis occurs. Paying off debt early without maintaining adequate savings can put families on the brink in case of job loss, income reduction, divorce, accident, or illness. Instead of focusing single-mindedly on paying off all debt, today's families need to ensure they are financially sound and keep their options open when something unforeseen happens.
Voluntary Credit Constriction
A lot of people think that closing accounts or asking that the limits be lowered after their balance is paid off is a good idea. Actually, unless you absolutely can't control your spending habits, the opposite is true. When your debt to available credit ratio goes down, your credit score automatically goes down with it. Plus, limiting your access to credit can be detrimental if you should suddenly face a financial setback.
Ignoring Retirement
One of the first things to suffer when individuals are facing large debt payments are retirement contributions. However, this can be disastrous to your long-term plans, even if it offers short-term benefits. Missed employee matches can never be made up. Neither can any missed tax deductions or potential dividends or gains. Balance your focus on eliminating debt with putting something away for retirement. Make sure you at least don't miss out on your company match.
Raiding your retirement funds
Tapping into your retirement funds is probably one of the worst ways you could choose to pay off your debts. While the option is there, the taxes and penalties are high, not to mention all borrowed monies have to be paid back. Again, any potential dividends or gains are lost while the root cause of your spending issues is not addressed. Think twice before going this route which can sabotage your long term wealth and plans.
Debt Beyond Belief
Some people find themselves facing credit card debt or medical bills that total more than a year's salary. They could struggle for years and never pay off what they owe. Many of these folks could have avoided the crisis they're in, but often they're just victims of bad luck, rather than bad choices. Bankruptcy becomes their only option.
Bankruptcy no longer has the long-term impact on your credit as it once did. You can get reasonable mortgages within two years of filing, auto loans within months, and new credit cards almost right away - albeit at a higher rate. While that's not exactly good news, sometimes it's just what's needed to get back on the right track.
Achieving the financial and personal freedom of being totally debt free is only a dream for most people. However, that doesn't have to be your reality. Being debt free is totally achievable if you have persistence and patience in sticking with a well-thought out plan.
Mistakes That Could Hamper Your Battle With Debt
By: Mark Andrade
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