Top 5 ways to tackle debt in a recession
Debt in itself isn’t a bad thing, and most people in their lives encounter some form of debt. Consider a mortgage, which can help you to own a home and build wealth if your home appreciates in value. or a credit card loan, which can grant you quick access to funds in a tight financial emergency situation.
In all these instances, the attitude you show towards it from the onset, and the planning that goes into the repayment of the funds holds the secret to having a successful debt journey. In a recession situation like now, taking too much, or taking the wrong kinds, such as high-interest credit card debt, can hamper your ability to pursue other financial goals.
So how do you manage your debt, whether it’s small or a huge chunk? However, it’s possible to stay on top of the waters with these tried and tested debt management strategies.
1. Know How Much You Owe
The first step in moving out of any difficult situation is to be conscious of it and understand the extent of the problem, and debt is no different. What do you do then? Make a list of your debts. Use a debt reduction software or a spreadsheet for easy organization and include in this list the creditors, total amount of the debt, monthly payment, interest rate, and due dates. Once done, you can calculate our debt to income ratio (DTI), which lets you know how much of your income can be used to pay off your debt on the due date. It is computed as your total debt payments divided by your income, and then multiplied by 100. Got it? Now you have your DTI ratio.
2. Always Pay Your Bills on Time
Maintaining an Excellent/Good credit score means you must meet the minimum payment requirements on all your debts every month. Credit history is the single biggest factor used to calculate your credit score, so missing any payment can result in penalties that only add to what you owe, and you wouldn’t love to be in such a situation. In a situation where you can’t find a way to meet your payment deadline, seek help immediately.
3. Decide Which Debts to First Focus On
Credit cards are generally known to carry the highest-interest rates (or APR), and you would want to pay these off first. The lowest APR for a US credit card is 16%, and accumulating this debt month after month is considerably going to lead to a chunk of outstanding debts, and that ain’t good news.
Lauren Anastasio, CFP, Director of Financial Advice at Stash says: “Being in a position where you’ve eliminated those types of high-cost obligations allows you to better prepare for other things financially. The more you’re able to put aside for saving and the less debt you have, it’s going to be available to you in case of an emergency.”
4. Build an Emergency Fund
It’s a common thing to go into debt to cover an emergency expense or rather turn to unemployment insurance for help with income if you happen to be without a job.
Never downplay little contributions. Accumulating three to six months’ worth of expense reserve can seem like a daunting task, but doing that regularly and adding up to your savings account will be just the catapult you need to transition you into a frequent saver
5. Use debt consolidation loan repayment
You can use a debt consolidation loan to pay off your debt. It is of low interest rate making it ideal for the payment of credit card loans. By consolidating all debt data into one single payment, managing it becomes easier and thereby giving you a clear roadmap as to your debt status
Creating long-term sustainable wealth is easy and within everyone’s reach but it starts with getting your personal finances right, and most especially your debt obligations. Follow this guide with grits and patience, and you will be able to say goodbye to debt stress with ease. “Wars in old times were made to get slaves.” says Ezra Pound, “The modern implement of imposing slavery is debt.” And no man wishes to be a slave.