The key to reaching financial freedom is to change your bad habits when it comes to finances. Here are some tips that can help you avoid the common pitfalls that plague individuals fighting debt…

• Have a Spending Plan: Building a spending plan will allow you to see how much money you need each month to pay for fixed costs, and determine how much discretionary income you will have left over. The issue of discretionary income is where many people fail in their spending plan. That is because most people take the money they have left after bills and place it into categories like entertainment or eating out. This is asking for trouble! You cannot predict the future, and what you spend money on will change for month to month. Instead, decide for yourself where you will use your discretionary income. You know how much you have, and when it’s gone, it’s gone! This is extremely liberating because you can do/buy the things you want, while still being financially responsible. Look under the “Financial Tools” section of my site for some free spending plan forms to get you started. (If you’re married and building a spending plan, read my article Money Fights.)

• Don’t Wait to Start an Emergency Fund: Many people believe you should not be putting money into a savings account when you have debt. On the surface, this makes complete sense. Here’s the problem though. If you have no money put aside, what will you do if an emergency does come up? You’ll charge it! Now you’re right back where you started. Instead, try starting a baby emergency fund ($1,000 - $1,500), and then start attacking your debt. While you’re building this emergency fund, pay only minimum payments on all your other bills, allowing you to reach your goal faster. Now you can dedicate all your extra income to paying off debt, knowing that if something does happen you have the cash to cover it.

• Avoid Balance Transfers: When it comes to transferring high-interest cards to lower-interest cards, you’re better off avoiding this all together. The idea is, you get a card with a lower interest rate than your current card offers, and transfer the balance, allowing you to save money and pay-off your card faster. Unfortunately, most of us will end up using this card at some point or another, and before you know it your introductory rate has expired. That’s how they get you! Now you end up with a higher interest rate than you had on your original card (usually 18 - 20%).

• Avoid Making Minimum Payments: You should never make a minimum payment (unless you are dedicating all your extra income to a baby emergency fund). Even if you can only afford an extra $10 a month, send it. Over time, this will drastically improve your credit rating.

• Avoid Making Late Payments: This may sound like a no-brainer, but you would be surprised how many people fall into this trap. When money gets tight, it’s easy to look at your credit card bill and say “It’s only a $25 late payment fee.” Well, it’s not just a $25 late payment fee. When your account reaches 30 days past due, the lender can place your account in default which can double or even triple your interest rate. Not to mention this will negatively affect your credit report/rating. That’s not all though! Most creditors have a universal default clause that allows them to share this information, resulting in other lenders raising your interest rate as well. If you truly can’t make a payment, talk to your credit card company. Most of them can lower your interest rate temporarily if you notify them before your account goes into default.

• Check your Credit Report Often: At a minimum, check your credit report annually for errors (you can do this for free here). Some financial advisors will even suggest checking it quarterly. Doing this has multiple advantages. If you find information that you feel was falsely reported, you can challenge it (learn more about this here). Also, it forces you to be actively involved with your credit history.

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