| Don't Fight Debt The Wrong Way - Common Debt Management Mistakes |
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| Written by Mark Andrade |
| Friday, 30 July 2010 18:35 |
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Many people are trying to eliminate their debt these days to gain greater control over their lives and financial security. While reducing debt is prudent, going about it the wrong way can have long-term negative ramifications. How you got into debt in the first place will dictate the choices you need to make to effectively eliminate your debt and start building long term wealth. Watch out for these common mistakes:
Many people are trying to eliminate their debt these days to gain greater control over their lives and financial security. While reducing debt is prudent, going about it the wrong way can have long-term negative ramifications. How you got into debt in the first place will dictate the choices you need to make to effectively eliminate your debt and start building long term wealth. Watch out for these common mistakes: Wrong Debt Focus For most people the last debt they should retire is their mortgage. As long as mortgage interest is tax deductible and rates are low, this should not be your highest priority. Instead, focus on paying off higher interest debt and ensuring you have enough funds to meet a financial emergency such as job loss, car repairs, illness, etc. Limiting Your Flexibility 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. Voluntarily Tightening Credit When individuals launch a full out battle on debt, they often resort to cutting up their credit cards and closing their accounts. However, credit cards can be an important safety net in case of a job loss or other financial setback. You could live off them for a little while if you had to. Plus, lowering your debt to credit ratio negatively impacts your credit score. Having credit, and using it responsibly, even occasionally, is evidence of your ability to successfully manage debt. Forgetting About 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. Dipping into Retirement Savings There's only one thing worse than suspending retirement savings and that's raiding what you've already set aside. Withdrawing retirement funds early costs you in taxes and penalties. Not to mention the future tax-deferred returns that money could have made. Plus, the loaned amount still has to be paid back. This approach is often a band-aid cure rather than a long term fix because it usually masks a spending issue and prevents many people from overcoming their debt problems. Forcing yourself to save retirement plans for retirement only can lead you to find real solutions that will ultimately create, rather than destroy, future wealth. Debt Beyond Belief Sometimes, despite our best efforts, we find ourselves in an overwhelming financial situation. Maybe it could have been avoided, maybe not. If your debt has gotten so out of hand that you would have to struggle for years to pay it off, then maybe filing bankruptcy is the best option. This is not a choice to take lightly, but certainly filing bankruptcy does not have the stigma that it once did. 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. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Visit our website all about EZ Payday Loans which gives practical advice to those experiencing short-term financial difficulties. It also offers information on getting a Faxless Payday Loan, as well as tips on saving, budgeting, and other spending decisions. |