Yahoo Finance I’m a Financial Advisor: 9 Money Mistakes People in Debt Make — and How To Avoid Them
A recent Experian report found that the average American consumer has $104,215 in debt. While this does include all types of consumer debt, including mortgages, student and auto loans, credit cards, store credit cards and personal loans, that’s still a significant amount of money for one person to owe.
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It might make sense to incur some kind of debt, such as if you’re buying a house and have a good plan to pay off your future loan. But it’s all too easy to keep accumulating debt — sometimes to the point where it seriously hurts your financial goals and long-term security.
GOBankingRates spoke with two financial advisors, Colby Van Sickler and Derek Jacques, about the top money mistakes people in debt make and how to avoid them.
They Let Emotions Get In the Way
Emotional spending is a very real problem, one that’s sometimes exacerbated by the stress caused by having a lot of debt.
“I once had a staff member whose coping mechanism was shopping. There was always something on sale that had to be purchased, and it was typically on their high-interest credit cards. Every month, they would say they were going to change, but every Monday they would have something new,” said Colby Van Sickler, an advisor and CEO of F3 Wealth Management.
For those who tend to make their purchases based on their current emotions or immediate wants, one option is to simply cut up or leave behind those credit cards.
“A credit card disassociates money from a purchase,” Sickler continued. “You swipe that card and take home whatever you want at that time. But at the end of the month, the cost of all of those ‘things that you wanted’ come due. Get your emotional purchases in check, before they lead to buyer’s remorse later.”
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They Keep Spending
More often than not, overspending is what leads to debt. But those who already owe money and continue to spend are likely to end up with more problems down the line.
“This is not uncommon, but it is obviously only going to add to their debt burden,” said Derek Jacques, a bankruptcy attorney and the owner of The Mitten Law Firm. “One thing I always suggest is to create a ‘needs’ budget, and stick to that. If it isn’t a necessity like housing or food, then don’t spend money on it.”
They Don’t Prioritize Paying Off Their Debts
Once someone gets into debt, it’s harder to get out of it — especially without a proper plan.
“Small debts such as credit cards with high interest rates can lead to unintended consequences. Consequences such as having to cancel health insurance,” Sickler said. “One auto accident or cancer diagnosis can lead to bigger debt that is difficult to overcome. While health insurance is expensive, it is not nearly as expensive as an out-of-pocket cancer treatment.”
Learning to prioritize and pay off those debts is one way to avoid this kind of financial mistake.
“Not all debt is the same. There are debts, like on credit cards, that will continue to accrue interest and get worse with time. While you may have other loans and debts to pay, the ones that are either well past due or are growing with interest need to be paid first in order to dig yourself out of the hole,” Jacques said.
They Ignore the Problem
It may be easier at the moment to ignore the problem, but it won’t help if those debts keep growing.
“It is very easy to simply ignore your debts, not pick up the phone when creditors call, and throw out any mail notices you receive,” Jacques said. “The best thing to do is actually communicate with your creditors. Often they have programs that can help you with getting caught up if they see you are genuinely making an effort to pay your debts.”
They Rely on Other Types of Debt To ‘Solve’ the Current One
Cutting back on spending is one way to start getting rid of debt, but some people try for “quick” solutions instead — ones that don’t always pay off.
“A common gambit is to run up credit card debt with high interest. The ‘easy button’ solution is to refinance their mortgage and roll that credit card debt into the new home loan,” Sickler said. “This is a solution, but not a good one if they don’t change their spending habits. This solution also means incurring new closing costs that further deplete their home equity. If you cannot change your spending habits, don’t destroy the equity in your house.”
They Neglect Saving for Emergencies
Paying off existing debt is important, but it’s also vital that you have some cash reserves for those “just in case” situations that come up.
“When you’re struggling financially, an unexpected expense can be devastating. Whether it be a medical problem or your car needs to be repaired, if you don’t have any cash reserves, you’ll have to go deeper into debt to pay these expenses,” Jacques said. “Put aside money from your paycheck in a savings account to cover these unexpected expenses.”
Even a small amount — like $500 or $1,000 — can help with minor emergencies and keep you from going deeper into debt.
They Still Try To Keep Up Appearances
There’s a popular saying — “keeping up with the Joneses” — that essentially refers to someone who spends more than they have just to try to appear like they have as much money, status and so forth as their neighbor. This could be in the form of a larger home or a more luxurious car.
Whatever the case, if the money isn’t there, then debt is sure to follow.
“Ten years ago, I had a client who was a dentist [who] built a brand-new office for their practice, which naturally came with high overhead. At the time, they had two kids in college, as well as two car leases that were $2,400 per month,” Sickler said. “When they looked at their financial life from the ‘macro’ perspective, they realized that they were leaking money everywhere.”
Rather than try to keep up appearances, focus on your own financial stability. Once the money is there, you can always buy that new car or bigger house.
They Pay Only the Minimum
Those high credit card balances can take years to pay off if you only pay the minimums due. And that original debt is just going to become more expensive as interest continues to grow on the amount owed.
Unfortunately, many people in debt only pay the minimum amount each month.
“This is especially problematic with credit cards, as interest will continue to accrue,” Jacques said. “If possible, pay at least 25%-50% more than your minimum payment in order to bring your balances down.”
And if this isn’t feasible right now, find ways to cut down on spending or boost your income so you can tackle your debts more quickly.
They Stop Maintaining Other Areas of Life
With debt often comes overwhelming stress. But this can also lead to neglect in other important aspects of life.
“Once debt takes hold of every facet of your life, people tend to neglect things such as maintaining their car or home,” Sickler said. “That neglect leads to larger repair costs, which typically requires taking on more debt. If the only way for you to pay off the debt is to get to your job daily, but your car engine dies due to neglect, you just killed the golden goose. Don’t neglect regular maintenance of your assets.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Advisor: 9 Money Mistakes People in Debt Make — and How To Avoid Them
