-- intro: Debt isn’t something that can be fixed quickly. It takes time, perseverance, commitment to self-improvement and sometimes, a lot of trial and error. Unfortunately, many people fail to realize this and wind up devising some terrible plans to get themselves out of debt. So, to help you from making the same mistakes, I’ve listed four cautionary tales of get-out-of-debt strategies that backfired for my clients, plus tips on how to avoid their mistakes on your own path out of debt.
quicklist:title: I Borrowed From My 401Ktext:
I’ve had numerous clients come to me lamenting the fact that they had borrowed from their 401K, citing that they were now in much worse financial shape than they were before. Why? Even though it’s your retirement “savings,” borrowing from a 401(k) or similar investment vehicle is not like withdrawing funds from a savings account. That money has to be paid back with interest and if you decide to leave your place of employment, you’ll have to pay off the loan in full.
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quicklist:title: I Put My House on the Line to Consolidate Debttext:
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If you find that you’re still struggling with debt after assessing your budget and cutting back on expenses, then it might be time to look for an extra source of revenue. This might mean freelancing work or picking up a part-time job. While it might be tough to handle the added workload, you can have some peace of mind in knowing it won’t be forever and that you're not putting your house at risk.
quicklist:title: I Alienated My Family By Asking Them for Moneytext:
Borrowing money from family can be tricky, and you have to be prepared for the cost of wrecking relationships if you mix family and finances.
quicklist:title: I Transferred My Balance & Just Kicked the Can Down the Roadtext:
While that low introductory rate on a new card might be tempting, self-consolidating your debt can backfire. I’ve had many clients come to me after doing so, only finding themselves in hotter water than before. Most people tend to forget that the introductory rate is temporary and tends to run out pretty fast. Not only that, but most cards will charge you a balance transfer fee that, if you’re consolidating a lot of cards, can put a dent into the savings you’d make on interest.
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The bigger problem is that many people don’t solve the underlying problems that got them into debt in the first place while they relax in the interest-free or low-interest grace period. It’s important to know where you stand and make a plan to get out of debt. Here’s one way to go about it: Look at the credit cards you’re currently using and rank them in order of highest to lowest interest rate. Focus all of your efforts on paying off the card with the highest interest rate first while making at least the minimum payments on the others. You’ll be ridding yourself of the most damaging cards first and won’t have to worry about added fees or a payment shot clock.
It’s also important to remember that there is nothing wrong with asking for help. There are plenty of services, books, and experts out there willing to offer guidance.
Any opinions expressed in this column are solely those of the author.