3/18/2011 11:58 AM ET|
5 signs you're kicking debt too fast
Paying off those credit cards is important, but if it causes you to neglect other important goals, you should consider tempering your zeal.
Anyone who's trying to pay down credit-card debt wants to be debt-free as soon as possible. Yet while racing to the finish line may save money in interest, some quick debt-repayment scenarios may actually hurt consumers in the long run, experts warn.
"When you're in debt, you just want to have it paid off so badly, and you can't wait until you sign that last check," says April Dykman, who writes about her ordeal paying off $27,000 in credit-card debt and car loans on GetRichSlowly.org. Paying off debt is like dieting, and crash diets don't work, Dykman adds. "If you're going from spendthrift to tightwad overnight, that's asking for failure."
But what's fast for one person may be the right pace for another, so here are some signs that you might want to slow your debt repayment process down:
1. You haven't planned for emergencies
With so many banks offering less than 1 percent in interest on savings accounts, some people say it's a better investment to use all their money to knock off more expensive credit-card debt than save money for a rainy day. While you may get out of debt faster using that approach, you'll be reaching for your credit card again the next time your car breaks down. "Life's not going to wait for you to get your credit cards paid off before something happens," says Marcia Brixey, the author of "The Money Therapist: A Woman's Guide to Creating a Healthy Financial Life."
While you may not want $20,000 sitting in a savings account while you have $10,000 in credit-card debt, use some of your money to create a "baby emergency fund," Dykman says. Having $500 or $1,000 socked away will take care of minor emergencies, so your debt-repayment plan can stay on track.
2. You're neglecting key areas of your life
While it's smart to scale back on certain areas of your budget to put more money toward paying down debt, some people either cut certain categories altogether or create unrealistic spending plans that lead to problems in other areas of their life.
"A realistic spending plan has your house payment, utilities, transportation needs, food needs and some clothing needs," says Mary Gresham, a clinical psychologist in Atlanta who specializes in money behavior. Not only that, but it incorporates socializing, which allows you to maintain important relationships. "It doesn't have to be excessive," Gresham says. "It could just be enough money to rent a movie and have a friend over."
Some areas you may not want to scale back on at all while paying off debt include health insurance and retirement accounts, particularly a 401k plan that offers a company match. Though you may pay your cards off faster by halting those 401k contributions, "you're robbing your future," Dykman says.
3. You're feeling deprived or easily agitated
While a key to effective money management is separating your needs from your wants, some people decide that their needs are the only things they'll spend money on until they get their debt under control. "It may work for a while, but at some point you're going to say, 'enough of this' and go out on a spending spree and spend way more money than you would if you hadn't been depriving yourself," Brixey says. Even while cutting back, leave a little money for small treats to keep life fun.
VIDEO ON MSN MONEY
This is bad advice paying off credit cards as fast as you can is the way to go.
i came from bad credit to great credit by paying down debt good and bad go hand in hand
i came up with a financial plan that would work for me and my number one bill is me i pay myself first.
that allowed me to save 25 percent of my income first every week the credit card i have is a low limit card
that i use for emergency and it gets paid off every month. JUST DO WHAT RIGHT FOR YOU AND DON'T TAKE
THE ADVICE OF SOMEONE WHO NEVER BEEN IN TROUBLE WITH MONEY.
Owing people money is owing people money. If it makes you "depressed" to pay it off for cryin' out loud then don't SPEND MORE THAN YOU MAKE!!!!!!
Elementary school 2nd grade!!!!!!
I got nothin' for you fools who used your houses value as an ATM.
"I didden't understand" is a baloney answer and an excuse.
Are you freakin' kidding me?!?! Who wrote this? Chase or Citi?
Shame on MSN for whoring their Money page out for this farce!
Pay off highest interest cards first regardless of balance with minimum payments on the rest. Most of all: STOP BUYING CRAP YOU DON'T NEED!!!
I cut up all of my credit cards 11 years ago and paid them off as quickly as possible. Now I follow the 66% plan. My monthly budget can NEVER exceed 66% of my monthly income. It works so well that 6 months ago I bought a new Chevy Silverado, and paid CASH.
You can never get rid of debt too fast. Only a financial incompetent or a manipulative writer with an alternate profit motive would write such a terrible article.
BANKSTERS today are the new MAFIA, if possible do not get involved with them They have proven that they are crooked to the bone!!!
Wow, I am in shock of how ridiculous this article is. Don't pay your debit off too fast. Come on! If anyone really wants to know how to get on the right track to being financially stable, try out Dave Ramsey. Financial Peace University. It's not for people who want a "get rich quick" scheme either, so if you're not ready to grow up, then that class is not for you. My husband and I have been practicing Dave's 7 steps, and I will tell you that his plan does work. We are paying our debit off, and faster than this article suggests. In fact, we are 1 month away from being DEBT FREE (does not include our mortgage, as we are on baby step #3)! Yeah baby! This is not new information either. You already know what to do, but it's forming a plan and putting that plan into motion on how to handle your finances. Nice try credit cards.com. Maybe your article will work on those who are not mature enough to handle their money. And we wonder why America is how many trillions of dollars in debt. It's advice like this. Sad.
This is perhaps the worse bit of financial advice in the history of the world. Yeah, keep your 20% interest rate credit card debt for six extra months because you are putting a rainy day fund together. If it rains, use the card, but in the meantime, pay it off, and then put the cushion together.
Nothing leads to more financial peace of mind than not having credit card debt hanging over your head. Pay off the smallest balance first, then the next, then the next - applying the amount you would have paid to the next card. Simple formula, and it works.
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