According to a recent report from Experian, the average American consumer carries $104,215 in debt. This includes all types of consumer debt, such as mortgages, student loans, car loans, credit cards, store credit cards, personal loans, etc., but the amount one person must borrow can still be significant. It's the amount.
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It may make sense to take out some debt, such as if you are buying a home and have good plans to pay off your future loans. But it's all too easy to keep racking up debt, and in some cases, it can seriously jeopardize your financial goals and long-term security.
GOBankingRates spoke to financial advisors Colby Van Sickler and Derek Jacks about the most common financial mistakes people in debt make and how to avoid them.
they interfere with emotions
Emotional spending is a very real issue, and the stress of having a lot of debt can make the situation worse.
“I once had a staff member who coped by shopping. Every item on sale had to be purchased, and it usually had to be done with a high-interest credit card. F3 Wealth Management “Every month they said they would change it, but every Monday they would do something new,” said Colby Van Sickler, advisor and CEO of .
For people who tend to shop based on their current emotions and immediate desires, one option is to simply cut or leave their credit cards.
“Credit cards separate money from purchases,” Sickler continued. “You can swipe that card and take home whatever you want at that time. But at the end of the month, those 'wants' are due.” Curb your emotional purchases before they lead to buyer's remorse later. ”
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they continue to spend
Overspending often leads to debt. However, those who have already borrowed money and continue to spend may face more problems in the future.
“This is not unusual, but it obviously just adds to the debt burden,” said Derek Jaques, a bankruptcy attorney and owner of the Mitten Law Firm. “One of the things he always suggests is to create a 'needs' budget and stick to it. If it's not an essential, like shelter or food, you shouldn't spend money on it. ”
They don't prioritize paying off debt
Once you're in debt, it's difficult to get out of it, especially without a proper plan.
“Small debt, such as high-interest credit cards, can have unintended consequences, such as having to cancel your health insurance,” Sickler said. “A single car accident or cancer diagnosis can lead to large debts that are difficult to repay. Health insurance is expensive, but it's not as expensive as out-of-pocket payments for cancer treatment.”
Learning how to prioritize paying off debt is one way to avoid these types of financial mistakes.
“Not all debt is the same. Some debts, like credit cards, keep accruing interest and get worse over time. Although you may have other loans or debts that need to be paid. , those that are well past due or have interest that keeps accumulating need to be paid first to get out of the hole,” Jack said.
they ignore the problem
It may be easy to ignore the problem at the moment, but it won't help if your debt continues to grow.
“It's easy to ignore your debts, don't answer the phone when creditors call, and throw out any mailed notices you receive,” Jack says. “The best thing to do is actually communicate with your creditor. If they see that you're serious about trying to pay off your debt, they can help you get involved.” They often have programs.”
They rely on other types of debt to “settle” their current debt
Cutting expenses is one way to eliminate debt, but some people instead seek “quick” solutions, solutions that don't necessarily pay off.
“A common tactic is to rack up credit card debt at high interest rates. The 'easy' solution is to refinance your mortgage and roll that credit card debt into your new mortgage,” says Sickler. Told. “This is a solution, but it's not a good solution unless you change your spending habits. This solution also means you incur new closing costs and further deplete your home equity. Change your spending habits. If you can't do that, don't destroy equity in your home.”
Not saving for emergencies
While it's important to pay off existing debt, it's also important to have cash reserves for a “just in case” situation.
“When you're struggling financially, unexpected expenses can be overwhelming. Whether it's a medical issue or a car that needs repairs, you can't afford to pay for them if you don't have the cash to spare. We will have to borrow more money to pay for the costs,” Jack said. “Save money from your paycheck into a savings account for unexpected expenses.”
Even a small amount, like $500 or $1,000, can help in a minor emergency and prevent you from getting deeper into debt.
They're still trying to keep up appearances
There's a popular saying about “keeping up with the Joneses,” which essentially refers to someone who spends more money than they have to in order to appear to have as much money, status, etc. as their neighbor. Masu. This could be in the form of a bigger house or a more luxurious car.
In any case, if you don't have money, you will definitely end up in debt.
“Ten years ago, my client was a dentist. [who] They built a brand new office for their practice, which naturally led to high overhead costs. At the time, they had two kids in college and two car leases costing $2,400 a month, Sickler said. “When they looked at their economic lives from a 'macro' perspective, they realized that money was leaking everywhere.”
Instead of trying to maintain respectability, focus on your own financial security. If you have money, you can always buy a new car or a big house.
they pay the minimum
If you only pay the minimum amount, it can take years to pay off a high credit card balance. And the original debt will only become more expensive as interest continues to accrue as you repay it.
Unfortunately, many people with debt only pay the minimum amount each month.
“This is especially an issue with credit cards because interest continues to accrue,” says Jacques. “If possible, pay at least 25% to 50% more than the minimum payment to reduce your balance.”
If that's not possible right away, find ways to cut your expenses or increase your income so you can tackle your debt faster.
They stop maintaining other areas of life
Being in debt often comes with overwhelming stress. However, this can also lead to neglecting other important aspects of life.
“When debt affects every aspect of your life, people tend to neglect things like maintaining their car or home,” Sickler says. “This kind of neglect leads to higher repair costs and usually means you have to take on more debt. If the only way to pay off the debt is to go to work every day, your car's engine will inadvertently stop working. If you do, you've killed the golden goose. Don't neglect regular maintenance of your property.”
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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
