If you are reading this post, chances are that you already understand what debt is and even may be neck deep in debt right now. That might even be true for you if just a few months ago you were actually making a pretty healthy salary.
There are some good reasons you could have for being in that condition. The first one being that you may have recently lost your job because of the pandemic and that has cut off your main source of income. That just about always spells economic disaster. If you were never really any good at saving money, certainly losing your job will make your financial situation a lot worse.
Living paycheck to paycheck and owing too much debt, however, doesn’t always have to do with what kind of salary you earn. That is because the road to financial stability and yes, the road to your financial freedom is always full of bumps.
Debt Is a Four-Letter Word
Debt will seriously impact your life and it can even destroy you. It is the single largest obstacle between you and your life’s dreams. So how can you ever recover and build and achieve your dreams when debt is just about always lurking around the corner? The answer lies in how you manage your debt every day, even when that debt is caused by something like a major loss of income. Can you manage your debt wisely even after you experience a job loss?
How to Best Deal with Your Debt
The first thing that you do whenever debt is staring you in the face due to a loss of income is to realize that you can and will recover and find income again. Unless you are physically or mentally unable to work, you will. That is why financial experts always talk about having alternate streams of income and frankly, the more, the merrier!
Work Towards Financial Goals
When you do have an income, goal setting becomes an essential part of dealing with debt. It involves setting time bound goals and working methodically to achieve them. You can set many small goals at a time or one big one. Either way, you can focus all of your efforts and then slowly and steadily work towards managing your income and your debt wisely.
Building a Safety Net
As you create a “managing my debt” spreadsheet, you can look for ways to try to save money. It is the place where Super Saving Tips was born. Saving money is just as important as earning money, because both ways of dealing with money will increase your wealth and reduce debt.
Any money you save needs some portion of it to go into a savings account and that should be one of the first goals you set to manage debt. Having a savings account means you have cash and you get to pay in cash for an emergency like home repairs or routine car maintenance.
Saving account funds can help tide you over unexpected difficulties. Experts use a “manage debt calculator” and recommend stashing away some money every month, even when making some kind of sacrifice in your life is the only way to do it.
If you had done just that, saving for a real emergency, losing your job during this pandemic would have been easier to deal with. Think about it for a minute.
You likely received a stimulus check. You may have gotten unemployment from your state (if everything has gone smoothly) and even received hundreds of dollars a week from the federal government in emergency unemployment relief, too. That plus your own emergency funds added into the mix and you might even have more income at this point than you normally would have! It has been happening for some.
Your monthly financial budget is the most important tool you can ever have and use to get out of debt. A monthly budget will give you freedom. How? When you actually calculate your expenses, you can now see and note areas where you can really save. That’s how we did it and we use a tool like Quicken to track our expenses and then come up with our own personal plans to save money every month.
It’s like washing your hair with shampoo, only instead of rinse, it’s track, save, and repeat over again and again.
Often times, people start getting sloppy with their finances as time goes by and they never really get any better at saving each month. Never let that happen to you.
Pay your bills on time to avoid backsliding. If it helps, always pay in cash rather than credit. Never treat your home equity like it is a piggy bank, because those funds are for problems other than any routine debt you might run into. Never run up your credit card balances to a point where you pay interest and carry balances…that’s a given, too.
Avoid Paying Just Minimums on Debts
Many people simply make minimum payments on their debt. This is not an effective way to deal with it.
Suppose you have a debt of $15,000 with an interest rate of 16.99% on one of your credit cards. By only paying a regular minimum payment every month, you could actually end up paying $13,000 in interest alone over the next 21.5 years to pay it off. In short, paying just the minimum of your credit card puts you at tremendous financial risk and continues to pile on your debt. And the worst part is that credit card companies see you as “good payer” and want to extend your credit even with this kind of struggle in your records.
Know the warning signs of driving on the bumpy road
- You are unable to make daily purchases without swiping your credit card
- Even minimum payments are impossible for you to pay off
- Your interest rates are piling up and you have reached the maximum limits on all your credit cards
- You are getting letters and phone calls from collectors to whom you owe
DIY Solutions to Managing Catastrophic Debt
What are the best ways to get to get out of debt? First, negotiate with your creditors.
You can talk to your creditors to lower monthly interest rates, come up with new terms, or simply reduce the total amount you owe. This is a good option to manage debt for someone who has the time and necessary skills to deal with multiple creditors.
Cash in some of your stocks and bonds, real estate, or sell your second car or some other hard assets (even retirement fund assets). This may be the only good option to get out of overwhelming debt and if you do have to do that, you can prioritize building back up quickly. Overwhelming catastrophic debt may mean using overwhelming actions like that.
Use Your Home Equity
You could use a cash-out refinance or a home equity line of credit (HELOC) in a real emergency situation. This is a good solution to manage debt for someone who has equity in their home and qualifies for lower interest rates. I recommend having a cost-free low-interest HELOC account set up on your house for that purpose even if you never ever have to use it.
Credit Card Debt Strategies
This is only an option for people who have cash to spare at the end of month. There are different strategies such as getting rid of debt with the higher interest first or getting rid of the debt with the lowest balance first to reduce the total number of debts you have. Note that this is an option only for someone who can pay more than the monthly minimum on their balances.
These might not always be the right options for everyone. Hence sometimes, it is best to consult an expert. The more you educate yourself on different debt management strategies, the better will be your position in using them to get and stay out of debt.
A credit counselor is a professional who can help you get out of overwhelming debt. They review your financial situation thoroughly and help come up with a plan to solve the issue. There are many non-profit credit counseling agencies that can give advice on important matters like getting out of student loans, bankruptcy counseling/advice, monthly budgeting, etc.
Use a DMP
A DMP stands for Debt Management Plan. A debt management plan is an agreement between a debtor and a creditor that addresses the terms of an outstanding debt. This commonly refers to a personal finance process of individuals addressing high consumer debt. Debt management plans help reduce outstanding, unsecured debts over time to help the debtor regain control of finances. The process can secure a lower overall interest rate, longer repayment terms, or an overall reduction in the debt itself.
In most cases, a person is eligible for DMP if his credit card and consumer debt is 15-49% of annual income. You will need to show you qualify for the DMP and lower interest rates by proving you have adequate income to make payments each month. Only if you can manage and afford to pay additional upfront fees will a DMP be a good solution for you.
Consolidate All Your Debts
Only someone who has a good credit score and good spending habits can opt for debt consolidation. Debt consolidation could be done by taking out a loan or using a balance transfer card. This option works best if you have good credit and can afford monthly payments. Otherwise, it could end up increasing your total amount you owe rather than decreasing it.
It’s really important to fully understand a key element to managing debt and that is this: it is a two-headed spear where income is one head and controlling spending is the other. You must do both if you are ever going to avoid big debt and have a smooth highway to financial freedom on which you travel!
How are you dealing with debt right now? Is your income and saving strategy working or are you having a tough time making ends meet under this economic turmoil? What are you learning now about how to deal with debt that can avoid bumps in your future?