Are you camp “pay off debt with gazelle-like intensity”?
Most people want to pay off debt as quickly as they possibly can. They think their debt is the main obstacle keeping them from achieving their financial goals.
I used to see my debt as a huge problem that needs fixing before I can do anything else, both with my money and my life.
But debt is just one piece of the money puzzle. And there are a few good reasons to not prioritize debt repayment. So when is it okay to NOT make extra payments or pause debt repayment?
Here’s a few really good reasons for you to re-balance your financial priorities:
#1 Your Monthly Payments Are Too High
Bit off more than you can chew?
When your cost of living plus debt payments swallow the majority of your paycheck, leaving no financial wiggle room for anything else (or worse, exceed your income) you have a serious cashflow problem.
So you either have to reduce your expenses or increase your income, ideally both, and save that difference and NOT make extra debt payments!) until your cashflow is better.
I know this sounds counterintuitive to not pay every spare penny towards your debt. Most financial advice says paying as much as possible towards debt is a good thing, and most people are willing to cut back to get out of debt sooner.
But having too high payments is just choosing to stay in the paycheck to paycheck cycle (#3). It might feel good to be “responsible” and throw everything you have at your loans, but you are putting yourself in a lot of financial trouble.
If you have a lot of payments, reduce your overhead asap and get some breathing room, even if that means delaying or slowing down your debt repayment for a while. Having money left over is more responsible than paying extra on your debt and putting yourself in that financial distress of having nothing left over. Plus it feels better to have a nice cash cushion.
#2 Prioritizing Debt Over Everything Else
So you decided you want to get rid of your debt? It is great to have financial goals and being debt-free can be one of them.
But: Debt is not your biggest financial problem. Your primary focus should be on developing yourself, your skills, your character, learn how to leverage your skills to make a lot of money and develop good habits with money. This includes saving a larger portion of your income, investing (you can’t start early enough, time is your biggest asset) and leverage your energy for meaningful things that might increase your net worth in the long run. That is called building ASSETS. YOU are your biggest asset, so take care about yourself first, and then start building financial assets from there.
The truth is: Debt is just a number.
Paying off debt doesn’t suddenly make you better with money. The skills you develop now, on the other hand, do.
So work on your money mindset and develop good money habits. Obsessing about your debt is not serving you at all.
Next to that, if you obsess too much about your debt, that’s basically what you will create more of. Debt will constantly be on top of your mind instead of focusing on creating more money which will eliminate debt naturally.
#3 You Have No Savings
Paying off debt without any capital tucked away is like having a leaking roof. You keep putting buckets under every leak to not flood your house, when really, you should get the roof properly fixed.
What I’m saying is that most people frantically make debt payments to save interest. (No judgement if that is you, I used to do that, too.) What they don’t see is that lack of liquidity is the source of the problem, which needs fixing first (see #1).
Paying off debt doesn’t make you any richer. There is no point of prioritizing paying off debt (even when everyone tells you to) when your financial reality is currently unstable and you have a lot of uncertainty in your life and your finances (hello, Corona).
Create some financial security first. You should prioritize meeting your immediate needs and save up a nice sum before you even think of paying off your loans.
Some say you need $1000 in your emergency fund, other 3-6 months of expenses. I don’t like the word emergency fund nor a fixed ‘one-size-fits-all’ number. Personally, I like to save in big chunks and see my money accumulate. Seeing and operating with large sums of money has become ‘normal’ to me and gets me in a higher vibe around money. I make it a practice to get used to and manage a lot of money. I encourage you to save as much money as possible at first, not because you “should” but to get you into a ‘rich mindset’. Get into the habit of paying yourself first and creating a positive experience around it.
THEN you can tackle your debt from a place of peace, confidence and abundance.
#4 You Care Too Much About Interest
But interest is secondary, really. Interest is the fee you pay your creditor for the courtesy of lending you money. It is the banks way of managing their risk and get compensated for taking that risk.
Unless you pay horrendous interest rates (double-digits), ignore the interest for a moment and focus on a clear plan.
It might seem sensible and rational to save ‘real’ dollars you might otherwise pay to the bank. It’s a psychological phenomenon called loss aversion. It means that you prefer to avoiding losses over acquiring equivalent gains.
People obsess about the minutiae of their debt more than they should planning their financial future.
Yes, it can save you a few dollars in the long run to pay off debt tackling high interest loans first. But interest is less important than momentum and maximizing your cashflow. I personally use a much more effective debt-payoff strategy that I explain in my free ebook “The Cashflow Makeover”. You can get it here.
#5 You Just Do What Everyone Else Is Doing
Your finances are nobody else’s business. I tried and desperately wanted to sit with the cool kids and be part of the club of the debt-free people. I followed all the traditional money advice until I realized that what most people are doing is not always the right way for me.
What you do or don’t do with your money is your choice alone. You do YOU. Personal finance is in fact personal and many roads lead to Rome.
I know that what I say and teach about money is not the most popular way to do things. But it works for me (really well actually). To me it is the safest and most pleasurable way of managing my money, so I choose to share it with you. I want you to be empowered by your money, not beaten up and overwhelmed.
Check out my blog post on how following the mainstream advice is hurting your finances here.
#6 You Have Negative Emotions Around Your Debt
I get you. You fear that if your don’t hate your debt, you won’t be “all in” and likely to fail or half-ass it.
But that is a choice. Here’s the truth: You don’t have to hate your debt to get out of debt.
You can get out of debt with all the the guilt, shame, resentment, anger and victim mentality. But as I like to say: You cannot hate your way to love. Resenting yourself for your past is not useful and it doesn’t help you create a more empowered mindset around money either.
Paying off debt from a place of guilt, shame and fear is not the best strategy to achieve better results with money in the long run. (See my post on negative emotions around debt here.)
Debt is not the end of the world and you can go at your pace. It really is no drama to delay
From my own experience, you get much more traction and better results if you work on your mindset first and take inspired action towards paying off your debt. Once I improved my cashflow, my debt melted away like ice in the sunshine AND I built a solid wealth fund at the same time.
Do you want to get out of debt? What is your biggest challenge?
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