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.
1. I Borrowed From My 401K
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.
And if that weren’t enough, your take-home pay will now be lower and you may even have to pay taxes on the amount of money you withdrew. By adjusting your cash flow and sticking to a budget, you may be able to get out of debt without dipping into your retirement.
2. I Put My House on the Line to Consolidate Debt
Much like borrowing from your 401(k), home equity loans replace once type of debt for another. One of my clients unfortunately realized this when it was much too late. They were thrilled to see that the interest rate on their home equity loan was significantly less than their credit cards, and decided to make the swap. Problem was, they hadn’t taken the time to assess what spending decisions had led them into debt in the first place and quickly found themselves back in trouble. Except now, they were faced with the added risk of losing their home and adding a foreclosure to their credit report, seriously damaging your credit scores. (You can see how your debt is impacting your credit scores for free on Credit.com.)
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.
3. I Alienated My Family By Asking Them for Money
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.
A particular case that comes to mind is a client who, over the years, had grown reliant on his siblings pulling him out of debt whenever he maxed out his credit cards. His family eventually grew tired of his excuses and decided they no longer wanted to associate with someone who only saw them as a bailout machine. My client’s poor financial habits lead to him not only falling into debt, but losing his family as well.
4. I Transferred My Balance & Just Kicked the Can Down the Road
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.
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.