15 of the Dumbest Ways to Pay Off Debt

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I work in finance and I blog about personal finance all the time, so I inevitably speak to dozens of people each month about their financial situations. And you know what? (I’m going to be blunt here) Some people just have some really idiotic things to say about paying off debt. In fact, I’ve heard so many head-scratchers in my short life that I just couldn’t help but write about it. So here you have it – 15 of the dumbest ways to pay off debt. 

15 of the Dumbest Ways to Pay Off Debt

If you’re my relative, my friend, or an acquaintance from just the other day…this article might just be about you and may even have some near-quotes from our recent conversations… I’m sorry (sort of). I love you, but you still made the list of the dumbest ways to pay off debt. I write this hoping you’ll read it, change your ways, and be uber-wealthy in the future.

If you’re convinced I didn’t write about you or our recent conversation, you still might be doing something similar to the below list of the dumbest ways to pay off debt. If you are, I hope you realize it, correct your current wrongs, and develop your dream retirement sooner rather than later.

In short, if you’re looking to pay off debt, I would NOT recommend taking action on any of the below items…

dumbest ways to pay off debt

1) Use Your Emergency Fund

You’ve got $10,000 in the bank and you owe just $10,000 on your student loans. After months or years of working to pay off your debt, it is SOOOOO tempting to just drop that $10,000 on the student loans and call yourself completely debt free.

But DON’T DO IT!

When people drain their bank accounts, THAT’S when things typically go wrong with their finances. 

  • They blow a tire
  • Their transmission goes out
  • They might even get laid off from their day job

Then they end up having to go into debt again…which completely depletes their motivation because they just spent all their efforts getting out!

It’s never wise to drain your savings – even if you are trying to do something smart like get rid of your debt

What to do instead

Instead of completely depleting your savings (which definitely makes the list of the top dumbest ways to pay off debt), keep at least $1,000 in the bank at all times. This isn’t your full emergency fund (of 3-6 months’ worth of expenses). It’s more of a skinnied-down emergency stash for when you’re rapidly getting yourself out of consumer debt. When things go wrong, you might need to be creative to stay afloat on just $1,000, but it should get you through without dipping yourself back into debt.

Related: 6 Reasons You Should Always Have $1,000 in the Bank

2) Withdraw from Retirement

Let’s say you’ve got $37,172 of student loan debt (which, by the way, is the average as of 2018…crazy, huh??) and you just so happen to have $50,000 in your retirement account.

Wouldn’t it be smart to just do away with the debt, even if it means pulling money out of retirement? I mean….”retirement is still so far away. There’s plenty of time for those funds to bounce back and support me in retirement…” says the innocent 20-something so matter-of-factly.

DON’T DO IT!

But why not? Why is this one of the dumbest ways to pay off debt?

Taking an early withdrawal from your retirement account (ie. any withdrawal before age 59.5 is consider early) will earn you a 10% penalty AND taxation.

  • If you try to pull out $40,000 to pay off your debt, you’ll be penalized by $4,000, and
  • You’ll be taxed at your income tax rate – say 22% – which means the government will keep another $8,800.

This leaves you with just $27,200…., which is $13,000 less than you thought you were pulling out.

Plus, when you take the money out, you’re foregoing the future growth of that investment (which is likely 8% or more each year).

What to do instead

Taking money out of your 401(k) is really just taking the easy way out.

  • You don’t need to plan,
  • You don’t need to work, and
  • The entire process is absolutely painless

If you go this route, chances are that you’ll willingly go back into debt just a few months later since you really experienced no pain to reconcile your wrongs (it’s kind of like when you raced your buddy, crashed your car, didn’t get injured and you parents just bought you a new car…did you learn anything? No. Will you probably race your buddy tomorrow? Absolutely…)

Instead of borrowing money from your 401(k), simply stop contributing to it and start focusing all of your efforts on paying off your debt. You’ll be amazed how quickly you can pay it off when all your efforts are coordinated to just that one thing.

Related: Should Jim Pay Off His Mortgage With His 401(k)?

dumbest ways to pay off debt - lottery3) Play the Lottery

Ahhh, winning the lottery would be an amazing dream come true, right?

  • You’d get yourself out of debt,
  • You’d buy that house on the ocean,
  • and you’d be able to help so many people in need with all that money…

People know that the odds are against them, but someone has to win right? And it could be them! So, they keep going back to that gas station to get their quick-picks in hopes of matching to those lucky numbers.

Do you know what the odds are of winning the big jackpot? One in 292,201,338

You’re actually more likely to:

  • Get attacked by a shark,
  • Be killed by a vending machine, or
  • Have identical quadruplets

And you know what? For every $2 spent, you’re only likely to win $0.32…That’s a $1.68 loss every time you shell out two dollars…

Let’s face it. One of the dumbest ways to pay off debt is by playing the lottery.

What to do instead

Instead of shelling out $8-$10 on the lottery each week, start applying it toward your debt! It doesn’t seem like much, but $10 a week over the course of 52 weeks is $520! That’ll reduce your debt totals by a noticeable amount!

Related: 5 Reasons You Couldn’t Pay Me to Win the Lottery

4) Wait for an Inheritance 

You’re not great when it comes to financial discipline… You really don’t have any savings, you’re in debt, and you can’t even claim to have a plan to right the ship…other than a potential inheritance from your dear old mom and dad.

Want to know why this is one of the dumbest ways to pay off debt? Because you’re planning on something you’ll probably never get. Or, your inheritance will be much smaller than you think.

According to CNBC, 68% of millennials are expecting an inheritance, but only 40% of them will actually receive one.

  • Either their parents don’t have much money (and therefore have nothing to leave), or
  • Their parents fail to make out a will…and the money never ends of making it to the desired heirs

The above scenarios are very real possibilities, which is yet another reason why you shouldn’t depend on outside elements to pay off your debt.

What to do instead

Instead of hoping that your parents will die soon (which is effectively what you’re doing if you’re wishing for the inheritance), ignore the possibility of an inheritance entirely.

  • This way, if they die and leave you nothing, you won’t be upset at all about it. You’ll just mourn the way people are supposed to when their parents die…with absolutely no thoughts of money or “what’s in it for you”.
  • And, if they do leave you some money, that’ll just be a bonus that you can either apply to your debts or your future retirement

5) Pray…and Then Do Nothing

Some people believe that this world has a purpose, that there’s a Creator that has a hand in everything (I do). These people often pray to God to thank him for their blessings, but also to ask God for even greater blessings – both in their relationships as well as their finances.

This is all well and good, but as far as I understand, God isn’t really into hand-outs. Instead, God rewards hard work…. So I wouldn’t recommend praying for a miracle while sitting on your butt, playing level 12 of MindCraft…

What to do instead

Instead of praying and then doing absolutely nothing to improve your financial situation, do both! It definitely won’t hurt!

reasons to get out of debt6) Starting a Business…With Loans

People that are in debt often find themselves in dead-end-jobs with no hope of escape. They look at their $80,000 in consumer debt, compare that to their $30,000 income, and then just assume that they’ll never get out if they stay on their current life track. 

So what do they do next? 

They decide that their only way out of debt is to start their own business…you know, something like a drive-thru pet shop that people just wouldn’t be able to get enough of. Oh yeah, and they take out a $100,000 loan to get started!

Guess what typically happens? 

The business fails (like two-thirds typically do inside of 10 years) and these people that were trying to get out of debt actually fall even deeper into it…

What to do instead

I think starting a business is an awesome way to earn extra money to shell at your debts…but just don’t go into more debt to start one.

Instead, start a super-cheap business for less than $100, put your sweat and tears into it, and start paying down that debt at warp speed! I did it with this blog, and I’m sure you can find something that’ll earn you money too!

Related: 14 Cheap Businesses You Can Start Today

7) Start Paying Your Largest Loan First

Out of all the “dumbest ways to pay off debt,” I think this one left me scratching my head the most.

Some people tend to gradually move from one line of thought to another. Others do a complete shift in a matter of seconds. It’s this second group of people that typically dive into something that makes little sense… And it’s not because they’re dumb. It’s more because they didn’t think much about the details before diving head-long into something they just recently heard of.

These types of people have never thought about getting out of debt in their entire adult life, but now they’re completely sold on it and want out of debt yesterday! So, they just start plopping money on anything, everything.

  • They pay extra on their house,
  • their student loans,
  • their massive car payment…you know, all the big stuff so it has a bigger impact.

But ultimately, actions like these will have minimal impact, and that lack of impact will drain the excitement out of these newly-gung-ho members of the “get out of debt” community.

What to do instead

Instead of putting money toward your big debts, you should really be trying to pay off your smallest debts first. Then, as you knock out the little ankle-biter debts, you can apply the minimum payments to the next-larger debts until they’re paid off too. This method is known as the debt snowball, and according to Harvard…is the most effective way to pay off debt. And, if you’re going to listen to anyone, I’d say Harvard is a pretty good resource…. 😉

Related: How the Debt Snowball Really Works (Free Tool Included for YOUR Debt Snowball)

8) Start a Go-Fund-Me Account

Really? Is this really a thing now??

  • You’ve been terrible with money all your life.
  • You make an income that the average person could survive and thrive on, but you’ve never had two pennies to pinch together because of your ridiculous spending habits.
  • And now, because your car broke down and you’ve never bothered to save up an emergency fund, you expect everyone else to pay for your bills through a Go-Fund-Me account?

Wowww…..

What to do instead

Please stop humiliating yourself and putting your friends in the awkward position of helping you when they know you’re just terrible at handling money.

  • Instead, roll up your sleeves and start working an extra job (or start your own business like we mentioned above).
  • Then, create a budget and actually stick with it this time.

When you dig yourself out of your financial hole, your soul will be filled with self-worth and pride. You’ll become addicted to success and want to do more – start a beginner emergency fund, get yourself out of debt, and maybe even start saving for retirement!!

Related: How You Can Save Hundreds of Dollars by Budgeting

9) Take Out a 401(k) Loan

This sounds smart at first glance, but it truly is one of the dumbest ways to pay off debt:

  • You want to pay off your high-interest debt
  • You don’t want to pay the bank 5% interest for a personal loan
  • So, you figure you’ll just borrow your own money at no interest and apply it to your high-interest debt

Makes complete sense, right?? No. Stop right there. Don’t do it!

By taking out that 401k loan, you’re actually:

  • Limiting your future earnings (instead of earning 8%+ on your retirement money, you’re now earning zippo!),
  • Tying yourself to your job (because if you switch companies, you’ll owe 100% of your loan in a matter of 30-60 days), and
  • Increasing your financial risk (if you end up losing your job, you’ll still owe the loan back!)

What to do instead

Instead of automatically borrowing against your 401(k) to pay off debt (which really is just moving debt by the way), take these steps instead:

  1. Question if what you’re doing is really worth taking out a loan for. Are you really desperate enough to risk your financial future with a 401(k) loan?
  2. How else could you pay off your debt? Could you scale back your expenses a bit more? Or perhaps earn some extra money with overtime or a simple side gig?
  3. If you have a debt that needs to go away and you simply can’t get your hands on the money without borrowing, it’s honestly better (in my opinion) to get a loan from the bank paying 5% interest than taking out a 401(k) loan.

Ultimately, almost any other option is better than taking out a loan against your 401(k). I know…your friends think it’s smart, but just wait till they lose their job and then are expected to pay their loan back in 60 days… It CAN happen, and you definitely don’t want it to happen to you.

Related: 8 Scary Simple Acts That Will Keep You Broke Forever

income restricted apartments10) Borrow Against Your House – Home Equity Loan

Houses typically go up in value. And at the same time, you’re paying down the balance. So, over the course of just a few years, you’ll start to build up some equity in your home (meaning, your home is worth more than you owe on it and you could therefore sell it for a profit). But, as long as you stay in the home, your earnings are locked up…and are completely inaccessible. That is, unless you take out a home equity loan…

It is at this point where people start to get all starry-eyed about the equity in their homes. 

“My house is worth $250,000? And I only owe $150,000?? That means I have $100,000 that I could do something with? Whoa! Think of what I could do with that money!!”

Yeah…you could buy a boat…a fancy car…or maybe even a wicked-awesome RV…which is what typically happens instead of paying off outstanding debts. And, all of those cool things you end up buying tend to go down in value…not up. So you’re ultimately much worse off than you were before you took the loan out on your home equity. 

What to do instead

Instead of paying off your debts by increasing your debt load on your house (which really doesn’t make all that much sense when it’s said that way – effectively, you’re just moving debt from one pocket to the other), just keep the equity in your house. It’s building value there and will continue to build value as long as you don’t touch it.

If you truly want to get out of debt, I always recommend that people roll up their sleeves and get to work! Then, by the time the debt is gone, they’re far less likely to take out loans in the future. When you put in the time and effort, you’re much more likely to learn your lessen in life.

11) Sell Your House

This is the other go-to answer from people that REALLY want to get out of debt, but don’t want to slog through each individual debt over the course of a couple YEARS… However, like I stated before, this is just the easy way out and you won’t really learn anything in the process. Over the next couple years, you’ll probably be back in debt, wondering how you got there…which is why this made the list of the top dumbest ways to pay off debt.

What to do instead

As long as your house payment is 25% of your take-home pay or less, and you like the area where you’re living, STAY THERE! If you sell your house, then rent for a period of time, and then buy another house, you’re just losing thousands of dollars to realtor fees, bank closing fees, unnecessary rent costs, and then realtor fees and bank fees again! It’s just not worth it

Instead…

  • Stay in your house,
  • Cut your budget down to nothing, and
  • Pay as much toward your debt as you can each month, getting yourself out as quickly as possible.

It’s not rocket science…but it’s going to take some serious effort, and plenty of determination.

Related: Should You Sell Your House to Get Out of Debt?

12) Flip Houses

About one year ago, Liz and I flipped a house and made $27,400. Not too shabby for 500 hours’ worth of work! But you want to know what the key was to our massive profits??

Cash.

Since we had the dollars to pay cash for this flip house…

  • We were able to buy it for super cheap (the seller knew we were serious and the deal wouldn’t fall through)
  • The closing costs were next to nothing (no need for appraisal fees, pre-approval fees, processing fees…etc.)
  • And we didn’t have to be in a huge rush to sell since we weren’t making mortgage payments, which meant we took the time to accept the highest and best offer.

If you’re in debt, you have absolutely no business flipping houses. In fact, it’s definitely one of the top dumbest ways to pay off debt. You know why? Because you’ll likely lose money in the process and actually rack up more debt!

  • You won’t get a deal on the house since you’ll be going in with a bank loan that the seller would rather just not mess with
  • The bank closing fees will be thousands of dollars instead of hundreds of dollars
  • And, the mortgage payments every month will keep you up at night. You don’t have the extra dollars to keep them up and it will make you way too willing to accept a low-ball offer just to stop those mortgage payments that keep eating away at your profits!

What to do instead

Stop looking at real estate. Period. You don’t need the added stress. 

Instead, focus on just two things (have you heard this before…? ;)): 

  • Cutting your costs, and
  • Raising your income

If you can dial back your spending each month while increasing your income, you’ll see some serious progress. There’s no need to throw a risky house-flipping project into the mix…

need to go to college13) Go Back to School…With Loans

I get it. You’re in debt, you don’t earn a ton of money, and you feel like the only way out is to…

  • get a better education,
  • increase your income with a higher-paying job, and
  • then pay off your debts easily and quickly.

This seems like a rock-solid plan, right?? 

Buuuut there’s a few other factors to consider. 

  • Chances are (since you’re in debt) that you don’t have the cash to pay for school, so you’re going to go into debt even farther before you start attempting to get out…
  • And, the odds of graduating with a degree are about 53%…All others just don’t finish and therefore don’t get the degree.

Do you realize what this means? Chances are pretty good that you’ll go further into debt, never finish your degree, and never see that bump in pay you were striving for.

So…if you thought life was tough before, wait until your student loans come due and your monthly payments elevate even higher than you’re used to today! This is not a spot you want to find yourself in…

What to do instead

Sure, your day-job doesn’t pay that much money, but I bet you can etch out some of your spare time to make money with a side hustle (here’s how you do it – turn off your TV and put your phone down…THERE, I just gave you 2-3 extra hours a day that you could use to earn more money! :)).

Need some ideas? Check out the related article below.

Related: 50+ High-Paying Side Hustles for Single Moms (Hint…many of these can be done by ANYONE…not just single women)

14) Debt Consolidation

Debt consolidation isn’t completely stupid, but it still makes my list of top 15 dumbest ways to pay off debt…

Why?

Because when you consolidate your debt, you’re really just doing two things:

  • You’re lumping all your debts into one easy-to-manage payment
  • You’re typically extending the loan payment terms, so you’re actually paying more money over time, but just fewer payments each month

On rare occasions, you actually get an interest rate reduction by consolidating your debt….but typically not.

So why is it that this is considered really dumb?

First, putting all your debts together and extending the terms doesn’t really help you get out of debt. It’s just masking the overall issue.

Second, when you consolidate your debt, you feel like you did something…when in reality, you just moved your money around and you still have the same large, looming debt that you can’t seem to put a dent in…

And third, there are so many rip-off debt consolidation companies out there that you’ll probably end up with a scam artist that does you more harm than good. 

What to do instead

Instead of letting someone else try to do the work of “getting you out of debt”, it’s best if you just tackle a few items on your own.

  • Call your creditors and let them know you’re having a hard time making your payments and see if there’s anything they can do (either reduce the amount you owe, reduce the rate, or extend the terms)
    • If they offer you a buy-out at a severely reduced rate and you think you can come up with the money, do it! It will save you massive amounts of money and at no charge to you!
  • Make a calendar to show all your payment dates. Then, write down your income amounts on the days you get paid. This will help you stay on track with your payments and ultimately start getting ahead
  • And of course, reduce your expenses and increase your income!!

Related: The Truth About Debt Consolidation

15) Treat It Like the Next Diet Fad

I’m only 33 years old and I feel like I’ve seen 20+ different diet programs in my life already. I mean, we’ve had…

  • Weight Watchers
  • Slim Fast
  • Jenny Craig
  • The Subway Diet
  • The Atkins Diet
  • Meal Replacement shakes

…the list could really go on and on.

People absolutely love the idea of losing weight, but they don’t necessarily want to do the two things that they know they really need to:

  1. Eat right, and
  2. Exercise

It really is that easy…but it’s not easy at all is it?? Eating right and exercising take discipline and continual dedication…which is why so many people tend to gravitate toward the fads than the realities of healthy weight loss.

And we do the same thing with paying off debt. 

We know the formula is simple:

  1. Cut your expenses
  2. Increase your income

…but it’s so much easier said than done. 

Instead, we gather up credit card reward points, investigate travel hacking, save money automatically through an app (to the tune of like…$6 a month…), get discounts with deals on Groupon (and FYI…probably buy things that we never really needed anyway), and buy expensive solar panels to save money on our monthly bills (which takes years to actually recoup the cost of the investment).

We want to improve our financial picture, but we don’t want to appear any differently to our friends and neighbors. We don’t want them to see us struggle our way out of debt. So, we’d rather hop on the fads that other people are doing and hope for the best.

Only…it never really amounts to anything…just like those diet fads.

So what do we do instead?

Be different. Look different. Start acting like your hair is in fire and it won’t go out until you pay back that last penny. 

If you truly want out of debt, you’re going to want to think about it all. the. time.

  • How can you spend less?
  • How can you earn more?
  • What’s going to move the needle next month so you can pay off more than you did this month? 

You want to get out of debt, so let’s do it already. Stop telling me about the dumbest ways to pay off debt and just do what’s simple and effective…The logical answers are often the best answers.

Related: The Absolute Best Way to Get Rid of Debt

Are you done telling me about the dumbest ways to get out of debt? Are you ready to actually tackle your debt head on??

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Get Out of Debt Money

LaTia Longuemire

AUTHOR LaTia Longuemire

My name is LaTia Longuemire. I enjoy writing, singing, and cooking in my spare time. My passion is helping others. At this stage in my lifetime, I'm primarily focused on my children. They are everything that keeps my world spinning.

15 Comments

  1. Derek, let me start by saying I really enjoyed this article. I’ve seen a lot of people make these mistakes – myself included. However, I do have to disagree with one of these. I think debt consolidation loans can be helpful. Back when I was younger I had several credit card bills that were charging me high interest rates on small amounts. Through my bank I was able to get a debt consolidation loan and a much lower interest rate. It took all my small payments and put them into one larger payment and I was no longer paying the 19% interest rate, it was more like 5%. I was able to pay off the debt much faster by not trying to keep up with the interest charges. But I do think you need to be very careful with them. It’s easy to just keep adding to your debt. Again – big fan of the blog.

    • Hi Bri. Yes, there are decent deb consolidation companies out there, but not many. Most are total crap, which is why I lean toward people just handling their debts and payments on their own (with an organized debt snowball). I’m so glad you liked the post otherwise though! It took way longer to put together than I thought it would!! 🙂

      • Couldn’t agree more. You did an amazing job! Please keep it up, I always look forward to your posts.

  2. I think that this article is one of the best that you’ve written. I enjoyed it immensely and feel that it will help many people. Good job!

    • Thanks Cooper! I think it’s by for the longest I’ve ever written, that’s for sure! But, I wanted to be sure not to just outline all the dumb things people do…but also include what they should look into doing instead.

      As always, thanks for being one of my most loyal readers!!

  3. Great article! Really enjoyed your insights.

    • Thanks! Glad you enjoyed it, EB. Plenty more good ones coming! Stay tuned!

  4. This is a really good article. Explaining # 7 to people over the years drives me nuts! Keep up the good work

    • Yup, starting with their largest loan first seems smart, but it just takes so long to pay off, most people lose motivation! It’s like paying off your house – few people do it because it’s just such a huge undertaking.

  5. Hi Derek, Love this post! So true, and unfortunately, I have made a few of these ridiculous blunders while believing that I was making the smartest choice. Oops!
    However, I don’t in any way regret going back to school using government student loans to finally get my bachelor’s degree in my late 30s. In my part of the world, the only jobs that pay more than just above poverty level are jobs that require a degree. As I have had many years in the job industry, and have always kept some kind of side hustle, I have learned this through experience. I am now 6 years past graduation. I was able to move up in the place where I work very quickly because of the degree, which doubled the salary I was making when I started. Without the degree, the limits are mind-boggling.

    • The key with taking out loans is that you actually finish the degree. That’s where student loan debt gets extremely dangerous. Glad to hear that you stuck with it, graduated, and are earning far more money today because of your degree though!

  6. I have two questions, one post for each.

    First, I have all of my student loans with FedLoan Servicing. I inputted all of these loans onto the debt snowball calculator, and for some reason my loan balances update at a slower pace than the Debt Snowball calculator. Do you know if consolidating my loans to one servicer affected how my payments affect my outstanding balances? Or perhaps my spreadsheet is just wrong in what I inputted somehow. Can’t figure it out!

    • Hi Jeremy. I don’t understand your question. You said you put your loans into the debt snowball calculator twice. You must have compared it to something else? Consolidating loans typically won’t speed up your payment time-frame (unless they reduce your interest rates).

  7. Second, I inherited 400 shares of Dominion stock upon someone’s passing away recently. I have about $98k in student loans. My wife and I have an emergency fund. I am weary of liquidating the stock and putting it all towards debt, when the amount could grow over time if I, for example, rolled it over into my ROTH. In your opinion, should I suck it up and put it all toward the debt?

    • Hi Jeremy. Your concerns are valid. The stocks may grow faster than the rate on the debt (moving the other direction). But, there’s also a chance that they don’t!

      For me, as long as there were no penalties, I’d liquidate the stock and put it all toward the debt, and then focus 100% of my efforts on that debt (meaning, also reduce that emergency fund down too!)! Once you get rid of it in record time, then you can save up an emergency fund again!


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