Good judgement comes from experience, a lot of which comes from bad judgement.
We all know too much debt is not a good thing, but debt management is not necessarily a skill we all possess. It’s not like you set out with the objective of borrowing more than you can afford. Debt slowly creeps up on you while you are focused elsewhere. You’re busy making ends meet, dealing with a marital breakdown or other family crises. The good news is we can all learn from our past mistakes. It’s important to use them as an opportunity to make changes, improve and move forward. The key is not too look at the mistakes as the end of the road. Look at it as a beginning.
Top 5 Debt Mistakes
Here are five common debt management mistakes people make that can lead to debt troubles. Today we can learn from each other.
Buying For An Uncertain Future
Obviously our purchases should make sense. You car has to be reliable. If your family is growing your home needs to fit your future needs. But often we look too far into the future – relying on our future income potential to pay for what we purchase today. Buying more home than you can afford can lead to debt overload. Assuming your income will grow in the next year, allowing you to pay off that line of credit is another mistake.
Whatever the cause, relying on your future earnings to pay off debts of today can quickly turn disastrous. Make sure you can afford to keep up with the monthly payments on any debt your acquire based on your current income. Future income is better being put towards paying off your debt sooner than your planned and savings.
Lure of Affordable Payments
Another big mistake is purchasing an item based the monthly payments rather than looking at the total purchase price.
Negotiating a lower monthly car payment may seem like a good idea, but not if it’s at the expense of another year of payments – and with interest. Another great example of this is rent-to-own. While you may be able to afford the monthly payments on your new furniture or TV, the total purchase price just went up.
If you add up all your monthly payments, ask yourself, are you really willing to pay that much?
Easy Credit Equals Easy Debt
This one you probably know but it’s worth repeating. Except for very major purchases (your home or car for example) credit should be used as a substitute for existing cash, not as an income source. Always be aware of how much debt you are carrying, and always try to pay it in full. Be careful not to borrow more than you can pay back.
Minimum Payments For Life
Another debt management delusion is assuming that if you are managing your monthly minimum payments you must be fine. Just because you have never missed a payment and are not ‘running out of cash’ before your next paycheque does not mean that you are debt sound. Owing as little as $1,000 on your credit card debt and paying only the minimum payments can keep you in debt well past retirement.
Compounding The Problem
Whether you are looking for a simple solution or just hoping your debt problems will go away, sometimes the actions we take either make matters worse or drag things out longer than necessary. One enticing, but predatory band-aid is the compelling payday loan.
Designed to ‘help’ you make ends meet until your next paycheque, these temporary fixes are costly and because of the money you lose to fees and high interest, actually make matters worse. They deceivingly advertise a dollar amount per $100 as opposed to the annual interest, which adds up to about 468%. Another example is ignoring the problems. Not paying your credit isn’t going to make it go away.
If you are in too deep, find professional support. If you need help budgeting and managing your finances, talk to a credit counsellor. If your debts are already overwhelming, talk to a debt reduction professional like a Licensed Insolvency Trustee (they can help, even without filing bankruptcy).
Acknowledge your debt mistakes. Take charge of them and look at them as a challenge. Developing better debt management is just a decision away.