The Rachel Cruze Show - The Worst Ways to Pay Off Your Debt

Episode Date: January 13, 2025

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When you finally decide to pay off your debt, you want that debt to be gone immediately. But there are a few ways to get out of debt that will actually leave you in a worse financial situation than where you started. So today, I'm warning you about some of the worst ways to pay off debt so you can steer clear of these common mistakes and do it the right, effective way. Now, before we jump in, make sure to subscribe and share this episode with a friend so they can avoid these traps as well. All right. The first mistake I see a lot is shuffling debt around. So listen, you're not addressing the root issue when you're doing this. And a lot of people just move their debt around because, you know, for different reasons, and we'll talk about those. But the point here is that just because you're shifting numbers around doesn't mean that your behavior is changing. And always remember,

when it comes to personal finance, your behavior change is what's going to take you into the future long term of winning with money. It's not going to be the math. It is you and your behavior. and your rhythms and your habits around money. So when you're shuffling money around, you're just prolonging the issue by just taking on different kinds of debt. So there's really five ways people do this. Number one is debt consolidation.

And so it sounds great because, again, people go after the interest rate, and they say, well, we can consolidate all your debt in this lower interest rate. And while mathematically, that's great. What ends up happening is a lot of these companies end up charging extra fees. And sometimes if you don't pay in the right way

and the payment plan and all of it, you get yourself in a bigger mess. And so you're putting a third party into your financial life, and you don't need to do that. Because, again, the interest rate isn't your issue. Your issue is the idea that, you know, going into debt and then now paying it off. And again, debt consolidation, the only time, only time I would look into it is with student loans. And that's about it because, again, people use debt consolidation with other types of consumer debt, but they don't address the issue.

They're just addressing the interest rate. Next is a personal loan. So, again, we've seen this a lot where people like go and just take out a big loan and they consolidate all their debt into a personal loan. Now, there are a few exceptions to this option. You know, we see some situations, but overall, overall, again, I would not choose this path. Because again, you are now taking on another loan, even though all the other loans are going into that loan. So again, it's just this idea of moving your debt around. But the sooner you just accept the fact of, hey, here's all in my debt and keeping it separate, even though some interest rates might be higher,

you actually get more of the behavior change as you're paying it off. Next is a he lock. And so what you're doing is you're taking the equity from your home and basically borrowing on that equity. And people are doing that in the same way they do a personal loan. They take out a helock. Use that loan to then go and pay off all the other debts. But now they still have a helock. And what you're doing is you're basically stealing the equity from your home and possibly the future earnings of that equity

when you pull it out into a loan. Also a 401k loan. People will go and borrow on their 401k. And what's hard about that is if you don't realize the fine print, if you leave your job in some companies, you have to pay back that loan within 90 days. Now, each company is different, but there are some risks involved in this.

And then also you're unplugging your long-term wealth-building play. I mean, what could be investing there and making you money, you're pulling that out into a loan. So not smart either. There's also the credit card shuffle, So this is very common. Again, you're rotating your credit card debt and paying off one credit card with another credit card because of the interest rate.

And again, it's just this idea of moving debt around. So all of these strategies, if you've done them, you are not dumb or stupid. None of that. No, no, no. These are very common practices in the world because people are motivated to get out of debt. But again, that issue specifically is only addressing the math. It's mostly addressing the interest rate. It's not addressing you as a person.

And the fastest way for you to get out of debt is when you get out of debt is when you get those quick wins, which is why number two is so important to remember. People use the debt avalanche instead of the debt snowball. So what we teach is when you get out of debt, you want to list out all of your debts, smallest to largest, regardless of the interest rate, pay minimum payments on everything, and attack that smallest debt first. And we say that because when you pay off that smallest debt, even if it's a $700 credit card debt, you paid off and it's this encouragement. I mean, it's literally this zap of hope of realizing, oh my gosh, I'm changing my ways. I'm doing something I've ever done before. We paid it off in full. We've never done that. Okay, that's possible. So what else is

possible? And then you look at the next debt and you say, okay, let's put some extra stuff, you know, income and cut expenses and we're going to pay off that second smallest. And then it's paid off. And you're like, wow, I can do this. Because you start to see that you are the magic to you winning with money. And those early quick wins is huge for behavior change versus the debt avalanche would say to list out your debts by highest entry. rate to lowest interest rate. So again, you're attacking the math side, not the personal side. So mathematically, that would be correct. But overall, again, it's going to take a smaller effect because you don't get as much hope in your system and in your life when you're trying to pay off

the highest interest rate. The third way to not pay off debt is debt settlements. And so what ends up happening with a lot of debt settlement companies is they just tell you to stop paying on your debt because they want it to go all the way down. and go into collections, and then they can step in and possibly get you payment plans and different debt levels and all of this. But what happens is it completely trashes your credit. It puts you not in a great financial situation. And again, it's kind of one of those like can be a cop-out type industries where they really do prey on people that are struggling. And when we see people and talk to people who have a lot of debt, you know, they want to jump to one of these companies because it

feels like they can help me. But as soon as you realize, okay, I'm the one that can solve the problem, I can do this, then you realize you don't need these companies and you don't need all these tricks. You can just do it yourself, which is a beautiful thing. All right, before I share the rest of my what not to-do list, I want to tell you about one of our sponsors to leave me. I saw a headline recently that really caught my attention. One third of the U.S. population's background info is now public. So for a 115 million of us, data breaches mean that our info is out there for anyone to find. And this is stuff like our names and addresses, phone numbers, and more. And this is why I love Delete Me because they find and remove your information from hundreds of

data broker websites that will buy, sell, or trade your information. So take control of your online privacy with Delete Me. Individual Delete Me plans start as low as $9 a month. Sign up today at join deleteme.com slash Rachel for 20% off or just click the link in the description. All right. The number four thing not to do when you're paying off debt. is not making temporary lifestyle changes. So always remember with money, money comes in and money goes out.

And these are two angles of money that, to a degree, we can control. So the outgo is huge. And people that continue to live, the same lifestyle they lived as they were going into debt, are not going to see a lot of progress. But when you say, hey, what if we just did scorched earth, we did nothing, like sacrifice to major for nine months, for 10 months, for 18 months, whatever it is, and not go out to eat, cut subscriptions, like anything that is not really food, shelter, utilities, transportation, insurance, or child care, like, let's lower everything.

Then you're going to see progress because that's going to mathematically create margin for you to have extra money to throw at the debt to get out of debt faster. But your lifestyle is going to have to look different while you're paying off debt. Number five is not giving while paying off debt. So this is kind of a controversial one. but it's one of these things that I just think is really important. It's not talked about a lot, but when you are looking at your overall financial picture, the rhythms and habits that you create, regardless of where you are financially, are going to take you long term where you want to go.

And giving, I believe, needs to be part of your financial picture because of what it does to you. You know, we can talk about math and interest rates and investing and like all this stuff, and that's all really great. But you, the person that's handling your money, motivation around how you handle money and what you do with money is everything. And so that's why money can be vilified because a lot of people see people with a lot of money and they're like mean, rude and shallow and they're like, oh, I don't want that. Look what that money did to them. But the truth is, money didn't do that to them necessarily. There was a part of them that was always that and it continued to magnify with money because your character and who you are in the

process is going to be everything. And I don't want money to be a sense of, of an idol for you or something that completely ruins your life because it can for a lot of people. And so working on who you are in the process, even if you're in a paycheck-to-paycheck cycle, even if you're paying off debt, when you are giving and living life with an open hand, you really are going on the spectrum of being selfish to self-less. I mean, there is something about letting go and giving. It changes you. It really does.

Yes, it gives you joy and it's incredible when it happens. It's so fun. It is so fun. But also, what it's working in you is everything, because as you're growing and building wealth, I want that to be magnified. And if that's not there at all, there's nothing to be magnified in that area. So be giving regardless of where you are financially. Now, one tool I would recommend if you are trying to get out of debt and stay out of debt

is a great budgeting app, and my favorite is every dollar. Because you'll see that budgeting is something day in and day out you're going to be looking at. You're going to be keeping track of your money, know what's going on, and be able to plan, especially if you're getting out of debt, finding that margin. So having a great budgeting app to help you is everything. And every dollar is my favorite. I'll put a link down below and check it out because you can actually build your first budget for free. Now, if you want to keep avoiding these kind of money traps,

you'll definitely want to check out my episode on the financial trend that's robbing you blind. Coming up next or if you're listening on podcast, click the link below. All right, you guys, remember to take control of your money and create a life you love.