It seems like there is a lot of potential for problems when you’re getting out of debt. You want to make the right moves, whether you decide to tackle the smallest debt first or whether you focus on the highest rate first.
Before you get too caught up in debt snowballs vs. debt avalanches, and worry too much about whether or not you can save to the extreme by pinching every penny, you need to address the elephant in the room.
The biggest mistake you might be making when getting out of debt is this: Not changing your financial mindset.
Debt is a Symptom, Not the Problem
Many of us start by thinking about debt as the problem. However, debt isn’t actually the problem. It’s a symptom of the way money has been used in your financial ecosystem. Even when you are plagued by unexpected financial catastrophes like job loss and medical bills, it’s important to take a look at your money habits to see if things could have gone a little bit better.
Back in my days of credit card debt, I wondered, initially, why I couldn’t seem to get ahead. I thought the debt itself was the issue, but the reality was that the way I used money and thought about money was the problem. No matter how much I thought I was putting toward reducing my debt, I didn’t make real progress until I overhauled my finances and changed my habits.
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Identify Your Money Problem Areas
I had two main money problem areas:
- I spent without thinking about my purchases, so I often bought things I didn’t want — and certainly didn’t need.
- I didn’t make building a cash cushion a priority.
Much of the time, I spent money without thinking about it. Sure, I’d put a couple hundred dollars toward debt pay down. However, it was often offset by mindless spending on a new gadget or a night out on the town. Getting out of debt is difficult when you don’t know where your money is going. Once I started paying attention and setting priorities for my spending, things changed.
I began thinking about money in terms of resources and what I could accomplish. This change in my money mindset made a big difference in my ability to stay on track and pay down my debt.
My other money problem area was the lack of a cash cushion. No, it wasn’t my fault when I blew a tire and needed to replace it. However, I didn’t have any sort of emergency fund available to me. I had to turn to a credit card — which I had just made a payment on. My debt was suddenly on the rise again.
Over time, I’ve used the idea of building emergency resources so that if I end up moving unexpectedly (as I did over this past summer), or if my car needs repairs and can tap into my cash cushion without needing to turn to credit cards. This offers peace of mind, as well as providing me with more financial stability.
Getting out of debt isn’t something I need to worry about right now, thanks to the fact that I changed my money mindset and the way I interacted with my finances all those years ago. Because I’ve changed the way I think about money and the way I manage my spending priorities, I have a cushion built up that can help me withstand a certain amount of unexpected income loss or meet my out-of-pocket insurance requirements if I end up in the hospital. I don’t have to dig a deeper debt hole when the unexpected crops up.
If you are struggling with getting out of debt, consider your situation and think about whether or not you are making the mistake of treating your debt like the problem, rather than going to your money mindset to see if there’s an issue there.