It is common to want or aspire to achieve financial freedom. Although you don’t need to necessarily have to be entirely free of debt for this to happen, knowing how to manage and handle debt is a skill that could prove very helpful and help you plan and manage your finances.

It is significant to be able to recognize good debt from bad debt. To understand and recognize debts better it is advised that you categorize your debts into two different categories: income-generating and non-income generating. A debt that assists you in buying assets that can help generate revenue for a long duration is good debt. Whereas, a loan that you took to purchase assets that do not generate any revenue can be classified as bad debt.

Having a debt record can be stressful. A lot of people are unaware and unknowingly adopt habits to clear the debt. This could be due to a lack of patience or the need to be free of debt as soon as possible.
What they don’t know is that some of these habits will increase the debt trap and make it even more difficult for them to get out of.

Here are 9 actions that can lead to a bigger debt trap.

1. Utilizing savings to pay off debt

You may think that it is a smart idea to use finances from a low earning savings account and pay off high-interest debt. However, this plan is one that can backfire. By doing this, you are worsening your situation and make it harder for yourself.
By emptying your savings account to pay off the debt you are leaving your household without an emergency fund. What happens if your car breaks down or you are met with a large medical bill? That’s right, you may resort to loans or credit cards. By using your savings account, you are making yourself vulnerable for future emergencies. Going into debt for every unexpected situation can be disheartening and nerve-wracking. You can avoid this mistake by setting up a separate fund for emergency uses or avoid turning to your savings account to pay off debt.

2. Splitting money between bills

It is often that people use a divide and conquer method of debt repayment. For example, a person that may have an extra $1000 will distribute it among five different creditors by sending them $200 each. Although it may sound like a smart strategy to pay down multiple debts equally, in truth, small payments don’t affect the balance.

This is a slow process of clearing a debt and a very tedious one as well. You may feel frustrated and realize that you are not getting ahead or not making significant progress to clear the debt. Without progress, you are less likely to solve your debt problem and may end up feeling demotivated. Concentrating all extra money on one debt at a time is a better strategy. With this plan, you will be met with quick results that will keep you motivated and move on to clearing the next debt.

3. Subscription plans

This one is a surprising reason, and you might not even see it coming. Subscription plans are another unexpected contributor to debt. You might assume that subscription plans won’t really affect your finances in the long run since the monthly cost is low. However, if you are subscribed to multiple services, the expense of each subscription plan will add up. This, in turn, will result in less money to put in savings, debt repayment, or other future plans and goals. Hence, it is necessary that you must be intentional about your subscription plans and only sign up for those that you really need and will use on a regular basis.

4. Opting for long term auto loans

Earlier, the general term for auto loans used to be 36 months. Nowadays, many financial entities will let you stretch the loan duration to 84 months, which amounts to 7 years. This makes no sense when very few use the same car for 7 long years. This results in the customer owing more money than the car’s actual worth. Moreover, they can’t sell the car to pay off the loan. This will create problems when you replace your vehicle and buy a new car. You’ll have two loans to pay, further increasing your debt.

5. The rewards hoax

Many credit cards have now started to suggest profitable rewards such as points that can be used to spend on travel and merchandise or cashback offers. This, in turn, tempts people to spend more on irrelevant purchases of unnecessary things to maximize rewards.
Although the reward system can prove beneficial to purchase things that you actually might require, it doesn’t take long for a person to start making extra purchases. Extra and irrelevant expenses will create a balance that can be strenuous to pay off each month. Moreover, the interest charges cancel out the value of the rewards earned. To handle your debts easier, you should not give in to the temptations created by the reward system and limit discretionary spending on credit cards.

6. Financing purchases long term

It has become common to make financing available for any purchase. For example, online payment systems like PayPal allows consumers to take six months to pay for anything that costs $99 or more. In simple words, you are indirectly borrowing money to make small purchases. By opting for financing, you will be charged extra money and burdened with interest charges. Financing also makes people carefree and irresponsible since it gets them to make unnecessary expenses that they otherwise wouldn’t have considered.

Although there are zero-interest financing plans that cancel out the debts, they are equally problematic. They might sound appealing and make you put off purchases for 18 months. It is highly likely that you make more purchases during the 18 long months. You are only adding more debt before even clearing the earlier purchases. Rather than opting for financing offers for retail products, save money and pay with cash to avoid increasing debt.

7. Making purchases due to other’s influence

It has become common for people to go into debt to make people around them happy. It is understandable if you don’t want to upset your spouse on vacation or your kids during the Christmas season. Emotions are difficult to navigate, making this debt trap even more difficult to handle. One way to manage this is by becoming aware of your motivations to make sure that you make expenses for the right reasons. Saving money beforehand while planning for these expenses can also help. Furthermore, have open communication with your family members or friends to keep their expectations rational.

8. Disregarding your options

Know that almost everything you buy is optional. It is easy to get caught up in social norms and societal pressure and make sure that you know about your options. If there is a cheaper option available that does the same job, then don’t hesitate to go for it.
You are not obligated to finance your degree from the most expensive university or get a new fancy car. These are the choices. Most community colleges or second-hand cars will bring you the same results. Research and scrutinize all your expenses to investigate if cheaper options are available and, if they are, then if they provide services that resemble your original choices. Pay less for more. This strategy will keep you from spending unnecessary money and avoid further debt.

9. Failure to gather knowledge about financial planning.

Many people are unaware of financial planning. This is one of the most common reasons that gets people trapped in debt. Failure to learn about financial basics can end you in a lot of debt traps. Without financial knowledge, you may not know how much interest is credited on payday loans or how you can avoid debt with financial strategies. Industries that add to your debt trap exist and are flourishing because of your lack of sophistication.

The good news is that this problem can be easily corrected. Books on finance, websites, apps, financial literary courses, blogs, and articles are readily available to educate yourself and learn the basics of money management. The article you are reading right now is proof of how these can prove to be of great help.

How to get out of debt

If you are already in a large pool of debt and don’t know the best way to do it or how to get started or are thinking of ways to tackle it and solve your debt issues, then you have come to the right place.

Here are 9 suggestions to help you get started. The more suggestions that you apply, the quicker you will get out of debt.

1. Spend less than planned

A lot of us have demands and wishes that are bigger than our pocket. One of the most common reasons to land in debt is buying what you want rather than what you “need.” If you want something, control yourself and choose not to buy it if you don’t have the money. If you can control your expenses and become satisfied with less than your ideal wants, even for a brief time, you can save the money and use it to pay off your debts. Paying off your debt should be your first priority. By the time you pay off your debt, you’ll become adjusted with managing your new priorities and can now use your saved money on other financial priorities.

Another strategy to spend less is to pay with cash rather than credit. Studies show that people spend 15% extra on everything they purchase when they use credit. Leave your cards at home, pay with cash, and don’t use them unless and until you pay off your debt.

Use the bare-bones budget strategy. A bare-bones budget only covers the basic necessities and does not allow you to make irrelevant expenses.

A bare-bones budget may vary from person to person. What is necessary for you may not be necessary for the others. Make a list of all your necessities, and don’t spend on anything outside the list. Keep in mind that this strategy is only for temporary use. Once you pay off your debt or get closer to your goals, you can head back to your normal lifestyle.

2. Clear the heaviest debts first.

One of the easiest and the most intelligent ways of clearing debt is to make minimum payments on all of your credit cards and debts except for one. Find and opt for the debt that is charging you the most interest and put all your attention and extra payments on clearing off that debt first.

Now that your most expensive debt is paid off use all the money that was reserved for the first debt on the second most expensive debt. By using this method to pay down all your debts, you will be left with the least expensive debt to clear last. Not only will this strategy get you out of debt easily, but it will leave you feeling motivated when met with progress. There are a lot of different variations to this strategy. This method is known as the snowball method.

3. Negotiate bills and ask for lower interest rates on credit cards

Credit cards with exorbitant interest rates make it impossible to handle balances. You can deal with this problem by calling your credit card issues to negotiate interest rates. It is surprising to know that asking for lower interest rates is common, and everyone does it. If you have a good credit score and a history of paying credit card bills on time, then your chances are even higher of getting a lower interest rate.

Other than credit card interest, there are many bills that are negotiable or eliminated. You can negotiate bills for Cable or Satellite TV, Medical expenses, Internet Service, car insurance rates, monthly rent payments, and many more. It doesn’t hurt to ask, and the worst someone can say is no. Keep in mind that the less you pay for your fixed expenses, the more money you can spend on paying off your debts.

4. Eliminate expensive habits

If you consistently get tied up in new debts, then it’s time to reflect on your spending behavior. Evaluate your spending habits and find out the small ways in which you are spending money on a regular basis. With this method, you can evaluate if the purchases are worth it and come up with ways on controlling such habits or minimize them.

Quit or minimize smoking or drinking. Remember that alcohol and tobacco do not have any positive functions and only stand in between you and your long-term goals. If your expensive habit is spending more on food than necessary, then you can find cheaper substitutes or services that offer the same food at cheaper rates. Make yourself coffee instead of spending it on cafes like Starbucks. The key is to replace.

5. Sell things that you longer require.

If you’re looking for an easy way to arrange cash in a short amount of then selling your belongings is your answer. A lot of us have stuff lying around in parts of our house, stuff that we no longer use or need. Sell the extra things and use these funds to pay down your debts.

A lot of neighborhoods permit garage sales. An old-fashioned garage sale is the cheapest and the smartest way to exchange your unwanted belongings for a profit. Other ways to sell your stuff is through thrift and consignment shop, online resellers like eBay or through a Facebook yard sale group. Moreover, you can even consider buying things you need off of garage and thrift sales and spend half the cost.

6. Get a second job or a seasonal part-time job.

Look for a second job or pick up an extra shift or two to aggressively pay off debts. Going for multiple jobs is one of the most common ways for people to pay down their debt. Although keep in mind that this method may not work for everyone and it will be tough to work for continuous long hours and have a busy schedule, but if you can make it work you can be debt-free within a short span. These extra jobs and shifts need not be permanent. Once you pay off your debts you can look back at scaling again.

Another way to generate extra income is by capitalizing on the skills and hobbies you enjoy. For example, if you happen to be a good painter then you can make canvas paintings and sell them online, or if you write well you can start freelancing for blogs, newspapers, brands, media outlets, or a freelancing website. If you are good with crafts, you can put your creations up for sale at Etsy. There are a lot of websites that can help you connect with people who are in need of your skills.

Then there are some people who use their homes to generate extra cash. If you have a basement that you don’t use, you can rent out the storage space or rent a room in your house. Online platforms like Airbnb will help you reach the right audience.

7. Contemplate balance transfer

If you are having trouble negotiating with your credit card supplier, and they are not willing to lower the interest rates, then you might want to look into a balance transfer. With a balance transfer, you can secure 0% intro APR for almost 8 long months. Check if you need to pay a balance transfer fee for using this service.

With a credit card balance, you can easily pay off during that time frame. Moreover, transferring the balance to a card can save you a significant amount of money on interest while helping you pay off the debt quicker at the same time.

8. Pay more than the minimum payment requirement

Make sure that you make a habit of paying more than your minimum payment requirements on credit cards, a line of credit, or overdraft. If you stick to the minimum credit card payments each month, then it will take you forever to pay off expenses made using your credit card. Since the majority of your minimum payments will be spent on paying interest fees rather than paying the actual debt or the amount you owe. If you wish to pay off your debts quickly, then make a habit to pay as much extra as you can afford. Even a small amount of $50 will go a long way. You can calculate this by using a financial calculator. The key is to do more than the bare minimum.

9. Have only one car for the entire household

If your family owns multiple cars, then consider getting rid of one. You can choose to either walk to work, carpool or use public transport. You’ll be surprised to know that you save thousands of dollars a year by using a single car for the entire household. Using this money to pay down your debt will create a huge difference. However, don’t go overboard with this idea right away, test drive the idea first. See if the other options work for you. Moreover, even if you decide to sell the other vehicles, a rental car or a taxi trip will be cheaper than keeping the other vehicles. Your other options are 80% cheaper than owning and operating a second car.

To conclude, discover the issue and investigate it to identify areas of concern to understand what is or isn’t in your control. The sooner you start acknowledging your debt, the sooner you’ll be free from it. You can create spending plans and bare-bones budget lists to keep your spending habits organized. If you are finding it difficult to start, then opt for a non-profit credit counselor. It doesn’t matter what kind of debt you are in, there is always a way out. The key is being consistent and changing your lifestyle. Set your priorities straight and start working on clearing your debt! You have nothing to lose and are one step closer to a debt-free life.