Financial stability plays a major role in leading a healthy and happy life. Yet many people face the challenges of carrying considerable debt, whether from student loans, credit cards, medical bills, or a combination of factors. So, what do you do when you’re trying to pay down debt on top of handling everyday expenses? Keep reading for some actionable tips to follow when you need to create a debt plan in times of financial struggle.
Finding Debt Relief When Money Is Tight
The continued increase in the cost of essentials — from food to rent — combined with stagnant or even reduced income, has taken a toll. Many people have seen their debt increase as their wages don’t cover basic expenses, debt payments, and savings.
Facing difficulties when it comes to money is tough, but the best thing to do is face your problem head-on. Ignoring it will just create a larger problem that’s even harder to resolve. First, gather your bills and make a clear list of everything you owe. Look for expenses you can cut, like streaming services and non-essentials. Next, you can try contacting your providers for services like internet, phone plans, and insurance to ask about possible reduced rates or discounts. Some service providers offer programs to help you find a more manageable monthly payment, such as paying a set amount each month for heating costs instead of seeing sharp increases in your bill when cold weather hits.
It’s also possible to negotiate a lower monthly payment or even a temporary payment pause due to financial hardships. Contact your credit card companies and any other creditors to discuss your situation and ask what they have available. You may need to provide proof of a reduction in income or inability to pay to get this type of relief. Some creditors may also offer you a settlement, which is a reduced amount you can pay to resolve your debt. This may negatively impact your credit score.
If you can’t pay anything at all, you can look for community resources that may have programs to help you or counseling to match you with a nonprofit credit counseling debt relief service, like the National Foundation for Credit Counseling. Filing for bankruptcy is another option if you face overwhelming debt.
Choosing a Debt Repayment Strategy
When you have multiple debts to manage at once, you must have a plan to prioritize paying off the most important debts first. Look at factors such as interest rates, total debt balance, and time overdue to determine which of your debts takes priority. Make sure to pay at least the minimum amount due each month to prevent damage to your credit score, which can make it even more challenging to secure favorable interest rates or further credit when you need it.
Avalanche Method
A common strategy for paying off multiple debts is the avalanche method. With this strategy, you focus on paying off high-interest debt first, thereby reducing the total amount you pay over time. Continue making minimum payments on all debts, but direct any extra money toward paying down the debt with the highest interest rate. Once that one is taken care of, continue the same strategy with the next-highest interest rate and so on.
Snowball Method
The snowball method is another one to consider. For this one, you’ll pay off the smallest debt first. Each time you pay off a debt, you have more money to direct to the next debt. This strategy helps you show fast progress, which keeps you motivated to resolve your debt.
Consolidation
Another way to pay off debts is to transfer all your credit card balances to a single card with a lower interest rate. Some cards offer a promotional rate of 0% APR. This gives you a chance to pay off your debt without racking up additional interest. Make sure you can make the payments to pay off the consolidated debt on the new card before it starts to balloon with newly imposed interest after the introductory period.
Should You Save Money or Devote Every Penny to Debt Repayment?
If you owe money, it’s natural to want to pay off debt as soon as possible, but having some savings set aside is usually a good choice. It’s important to take a close look at your individual financial situation; however, it’s often smart to set aside at least a small portion of your income for savings. This gives you a fund to dip into in case of emergencies, which can help to alleviate some of the stress that comes with money worries. A good goal to set is saving at least three to six months’ worth of expenses. Calculate your savings strategy to avoid further debt; saving money just to spend it on late fees and higher interest later won’t help. Create a budget and stick to it. You can increase the amount you save as you eliminate your debt.
A large number of Americans have debt concerns, and many worry about their ability to handle an emergency expense because they have little to no savings. No matter where you stand with your finances now, you can improve your situation. Take action by assessing your finances and making a plan, remembering to reach out for help if you need it.
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