Irresponsible debt habits can bring your personal finances down. Given how important it is to have a strong financial position, you should never act irresponsibly when handling your money. For example, if your spending habits are making you go beyond your budget, you should do something to correct it. In the same way, if your debts are making you spend beyond your capabilities to pay it back, then you need to start breaking these habits so it can be replaced by the good ones.
Unfortunately, habits are not that easy to break. This is usually an activity or behavior that comes naturally to you. It is even safe to say that your habits are something that you are good at or you enjoy doing. All of the characteristics mean it is something that you like to do. While it may not be as intense as an addiction, it will also require effort on your part to break it. You need to consistently battle within yourself to keep from succumbing to your natural tendency to do a particular habit.
While there are good habits, anything that involves debt is not one of them. We admit that there are good debts. But a debt habit means your first instinct is to turn to credit when your finances are limited. Instead of curbing your need to spend, you choose to use credit instead. If you consider debt as your backup, it can quickly accumulate without you knowing it.
According to statistics, the average American household owes $132,529. If you think that this includes home loans, you are mistaken. When you factor in mortgages, the average debt goes up to $172,806. The average credit card debt is currently at $16,061 and the average car loan is $28,535.
Tips to be smart with your debt habits
If you look at all the statistics, you have to admit that it is quite overwhelming and debt seems like something that is hard to get over. But like any problem that you have encountered, there will always be a solution. This time, the solution might be very hard because it will require a huge sacrifice and effort from you. To find out what the perfect solution is, you need to figure out the root cause of your debts.
It may surprise you that the root cause may just be your irresponsible debt habits.
The truth is, debt is not bad. It can be a very powerful tool that can help you improve your financial situation. It only becomes destructive because of how we react to credit. We are giving it the power to destroy our finances through our irresponsible debt habits. If you can break free from these habits, you can actually use debt to your advantage and it will never compromise your financial position.
So how can you get rid of these irresponsible debt habits? You need to change your mindset about it.
Calculate the interest
When it comes to your extra money, there is a debate whether it should be used to invest or pay off debt. Well, both options can be very rewarding. To make a smart choice, you need to look at the interest rate. According to Mark Cuban, your best investment is paying off your credit card debts. These cards have some of the highest interest rates – much higher than those that you will get from investments. So if you have a lot of credit card debts, you may want to think of it as an investment. This should be a better motivation than thinking that your money is going to your creditors and lenders.
Organize your debts according to priority
Another thing that you can do to get rid of debt habits is to analyze your debts by ranking it according to priority. There are two ways to do this. You can rank your debts according to the highest-interest rate (avalanche method) or lowest balance (snowball method). You will then pay all the minimum payment requirement of every debt. If you have extra money after, you will put all of that towards the first debt – which is supposedly your priority debt. You will stick to this until the first debt is fully paid. Once it is completely paid off, you will take all the freed money and put it towards the second debt on the list. The bigger payment will make you pay off the debt faster. Again, when it is completely paid off, you will do the same for the third debt on the list.
This type of debt payment method may be long but if you stick to it, will be quite rewarding. It is not like the other debt solutions that are fast. You will also be required to pay everything that you owe – without negotiating for a lower rate. It is not like you cannot negotiate. It is more of to give you a taste of how hard it really is to pay off your debts. Hopefully, it will teach you not to succumb to irresponsible debt habits.
Know the good and bad debts
Believe it or not, debt can be used to your advantage. But you need to know the difference between a good and bad debt. This knowledge will help you make the right choices when borrowing money. Make sure you analyze the reason why you are taking on debt. It’s quite simple actually. Ask yourself if the debt can help you improve your personal net worth. Or if the debt can help you be more productive. Can it help you meet long-term goals? If the answer is yes, then you are borrowing a good debt. But if the answer is no, then you might want to rethink borrowing that money – at least, until you have paid off your current debts.
If you try to implement these tips, you might be able to break the destructive debt habits that can seriously compromise your financial position. As you break them off, it is best for you to start working on the good financial habits that will bring you towards financial success.
How debt habits can ruin your financial position
Obviously, getting rid of debt habits will not be a walk in the park. But you do not have to dwell on how difficult it can be. You can start by identifying the reason why you developed these habits in the first place. Is it someone else’s influence? Or maybe you are trying to keep up with your peers?
According to research, it is believed that your knowledge of your negative feelings can help you find the “right financial path.” As difficult as it can be to get rid of debt habits, there is no doubt that you need to get rid of it. You just have to find the motivation to change.
There are two reasons why your debt habits can ruin your financial position.
Your decisions are impulsive
First of all, habits are technically impulsive decisions. Habits are actions and behaviors that you do without thinking. It comes naturally to you. It is also something that you do all the time because it gives you a positive feeling – even if it is only momentarily. But this is something that you need to be cautious of because it is not always beneficial to your financial position. Take impulsive buying behavior as an example. When you are not careful with your debt habits, you might end up using your credit card to be able to pay for an expense that you cannot afford to pay in cash.
You justify your bad financial decisions
Since this is something that you enjoy doing, you tend to justify it – even if the results are not positive. When you start making excuses for your bad financial decisions, you might blur the lines between what is right and what is wrong. It will distort your idea of what will help improve your financial situation. In the end, it might even lead you towards a financial crisis.