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Forge Your Wealth is meant for education and entertainment and should not be considered financial advice.
It is official, the US is in a recession. Even if the US quickly recovers from the slump caused by this pandemic, many people will have to pay off debt that was left untouched for a while. A tenth of mortgages are currently in forbearance even though it is arguable that the forbearance was necessary. Furthermore, student loans have been placed on hold until September. Debt may have been placed on hold for the time being, but now is a good time to prepare to knock out as much debt as possible. In this post I will give tips to pay off debt during tough times.
Save An Emergency Fund
Hopefully, you have an emergency fund set up. Even if it is only a thousand dollars. If not, you should take the opportunity of delayed payments to make a financial safety net during these troubling times.
This may not sound like one of the tips to pay off debt, but it definitely helps. It may seem counter-intuitive to save when you have a pile of debt. However, if you have an emergency, what will you do if you have no emergency fund? The answer is to go into debt. Knowing that can stress you and cloud your judgement. It is better to have money put aside. For instance, after my wife and I paid off our student loans I had a car maintenance/repair that was over $1,000. Luckily I had money saved for it. That would have been stressful if I did not have any money saved up. Not to mention a 17% APR credit card debt is much larger than a typical 5% APR student loan.
Now that many debts are on hold, you should take this opportunity to save an emergency fund, not only for emergencies, but peace of mind. One of the best tips to pay off debt is to develop peace of mind. Peace of mind will keep you consistent in making your debt payments when your debts are no longer on hold.
Manage Your Life
Many things in life just became immensely stressful. The world is figuratively on fire. Time to make yourself as fireproof as possible. If you have any thing that is creating uncontrolled debt, it is time to eliminate the source of the debt. Have a massive car loan? It may be time to buy a cheaper used car. If you seriously cannot control your spending at all with plastic, it may be time to pull out the scissors. If your home costs more than 50% of your income, it may be time to move.
You need to build your life to handle the stresses the world will give you. If your life was not built to handle the stresses the world throws at you, it may be time to re-manage or even start dismantling your life.
Say what you want about the safety nets the US has set up during this crisis, but I know that almost everyone can receive some help from at least one of the many levels of the government. Many cities including my city, the city of Philadelphia, did write laws to assist people severely affected by the pandemic. Furthermore, even in shaky situations including where landlords resist these new policies, you at least have more ground to negotiate with your landlord.
Eliminate Any Denial
It is easy to deny your debt, even before governments put them on hold. However, the holds the government placed on many debts is not supposed to force you to ignore it, but to collect yourself during trying times to take it on.
Furthermore, there are many forms of denial. For instance, when it comes to debt there is the denial of the debt existing, and the denial that you will need to put in effort to pay off your debts. I am talking about expecting the next person in the Oval Office to pay off your student loans. That is not very likely to happen. First, no such thing as a free lunch. Second, you should look more towards Congress than the president about debt forgiveness. Third, the only way a president will do this is to win less than 50 million (potential) voters, at the expense of losing out on high profile sponsor donations. Note, I added “potential” because most Americans who worry about student loans are not the largest population of voters. Most voters are older and the older you are the less student debt you have.
However, younger generations including my own are close to outpacing the number of voters in the Baby Boomer generation. It is possible US politicians will have to abide more to younger generations in the near future if they expect to win voters. Either way, the first and second reasons are probably going to be more crucial factors in forgiving student loans. A voting preference is never among good tips to pay off your debt.
Play By The Snowball Approach
I have brought this up in a previous post in more details. The snowball approach is a strategy where you pay off the smallest debt you have. This strategy should increase your morale. The “opposite” approach is the avalanche approach where instead you pay off the loan with the largest interest rate. This strategy mathematically will allow you pay off your debts more efficiently. I find many debates about these approaches and which one is the better approach. To answer which one is the best strategy let me ask you these questions. What is the trends of interest rates versus the size of the debt? When is your smallest debt not the one with the highest interest? Usually the smallest debts you have are the ones with the highest interest rate. Truth is either strategy will be at least among the best strategies. I think the debate of which strategy is the best is not worth the effort.
Consider Getting Help
I only recommend this strategy for loans with high annual percentage rates (APR). Sometimes money could be saved by consolidating your debt into a loan of lower APR. This should only generally be done when interest rates are low, which, at least for now, they are. I have never done this, so I am not an expert.
However, the people at DebtMD can help you find some help. I do not receive any money from DebtMD, but they have developed some of the best tools to help you find programs to help you with paying off your debt. I recommend checking them out if you need help with your debt.
The US has handed people a rare opportunity to avoid paying off debts. However, that does not mean that you have a few months to avoid paying off your debts, but an opportunity to collect yourself. You should save your money so you can avoid piling up debt even more.
Luckily, the crisis could have provided you with opportunities to save money. I think many people have been surprised at how much they have been spending on travel and restaurants before this crisis. You can try to save up as much as possible to prepare to pay off debts.
There will be tough times ahead for everyone economically, so you should take the time you have to save up to forge your wealth.