Debt can often seem impossible to overcome and can negatively impact our financial well-being and disrupt lives and mental health. Whether it's credit card debt, student loans or car finance, many of us face the difficult task of clawing our way out of debt.
While there’s no doubt that the journey to becoming debt-free is a challenging one, it’s also not impossible. When trying to get out of debt, even armed with the best strategy in the world, you’re likely to stumble into a few pitfalls. That’s why our experts at Salad Money are here to help you understand and navigate these drawbacks.
In this blog, we're going to talk about the four most common mistakes people make when attempting to get out of debt. From budgeting issues to emergency funding, these errors can significantly slow your progress and make your debt-free dream seem impossible.
However, by recognising these common mistakes, you can steer clear of them and stop worrying about your financial situation. Let's dive in and uncover these mistakes, so you can reduce stress and achieve a debt free life.
1. Ignoring a Budget and Financial Plan
One of the biggest mistakes when trying to get out of debt is disregarding your budget and financial plan. Many people underestimate just how important a well-structured budget is. They assume they can manage their finances intuitively, which can lead to reckless spending and accumulating more debt, eventually turning into perpetual cycle of financial instability.
Think of your budget like a roadmap that guides your spending decisions and ensures that your income aligns with your financial goals. It can help you prioritise debt repayment and build your savings. However, if you ignore this crucial tool, it can result in financial chaos and hinder your progress towards a debt-free future.
If you’d like to break free from this mistake, try to create a budget tailored to your income, expenses and debt obligations. Then, make sure to stick to it diligently.
2. Neglecting High-Interest Debt
This is another common mistake when trying to clear your debt. When people have multiple high-rate loans, they tend to focus solely on paying the minimum monthly repayments. By doing so, they unwittingly allow interest to pile up, which then extends the duration and overall cost of their debt. This oversight can be financially devastating.
High-interest debt is often found in credit cards or predatory loans, and it acts as an anchor, dragging your finances down. To rectify this mistake, you need to prioritise paying off your high-interest debts first. If you redirect funds from your lower-interest obligations, it can free you from compounding interest. This will not only help you become debt-free faster but also save you a significant amount of money in the long run.
3. Failing to Build an Emergency Fund
When trying to eliminate debt, another common misstep is neglecting to build an emergency fund. Sometimes, we’re guilty of pouring all our available resources into debt repayment, without setting aside some funds for unforeseen expenses. This makes them vulnerable to financial setbacks. For example, if you suddenly need emergency work on your car, or your bathroom sprung a leak - do you have the funds to get it sorted? This leaves people reliant on credit again, which only perpetuates the cycle of debt.
Your emergency fund is your financial safety net, giving you peace of mind and preventing you from relapsing into debt. It's an important component of a healthy financial strategy, ensuring that life's curveballs don't derail your progress.
To avoid this mistake when getting out of debt, keep a small portion of your budget aside to gradually build an emergency fund. This way, you can repay your debt while also saving money for sudden expenses.
4. Overlooking Debt Consolidation Pitfalls
Debt consolidation is a vital tool for simplifying payments and hopefully lowering interest rates, but it's worth doing your research before committing. However, many people overlook potential drawbacks and make the mistake of rushing into consolidation without clearly understanding the terms or potential consequences.
One common error is transferring your unsecured debt, like credit card balances, onto secured assets like your home equity loan. This can jeopardise your home if you struggle with repaying the debt. Additionally, many people overlook the fees and interest rates associated with consolidation loans because they think it's a quick fix.
If you want to avoid making this mistake when getting out of debt, make sure to thoroughly research your consolidation options, read the fine print, and consider seeking financial advice, if available. Debt consolidation can benefit you, but only when done wisely and with a full understanding of the potential risks.
For Fair and Affordable Personal Loans, Choose Salad Money
Now that you know some of the most common mistakes when getting out of debt, it’s time to start avoiding them.
At Salad Money, as the UK’s leading ethical loan provider, we believe that the traditional credit score system is often unfair to people with low credit who need access to cash, quickly.
Our unique affordability assessment system will accurately assess your ability to repay a loan and provide you with the funds you need. If you’re struggling to get a loan from traditional lenders, our More Than Your Score loans are here for you.