Three debt strategies
The past year has fractured our world in countless ways. Now, as people seek to pick up the pieces, those who manage the debt must be held accountable for their position in our uneven economic recovery.
In this so-called K-shaped recovery, part of the population rebounds quickly while another has a longer and slower path. For example, in January, the unemployment rate for whites was 5.7%, compared to 8.6% for Hispanics and 9.2% for black workers and 6.6% for Asians, according to the Bureau of Labor. Statistics.
Those who remain unemployed or underemployed could continue to take on debt to get by. Meanwhile, those whose finances have remained stable or improved may be ready to write off their debt.
DEBT MANAGEMENT IN THE LOWER HALF
Some consumers have had no choice but to go into debt, including unpaid rent or mortgage, credit card debt and overdue utility bills. If this is your case, focus on basic needs and pay minimums to avoid collections.
– PROTECT THE ESSENTIALS: If you’re one of the millions of Americans unable to cover your housing costs right now, take advantage of the eviction moratorium and mortgage relief programs now extended through June 30. Keep an eye out for additional benefits in the COVID-19 relief packages being discussed in Washington, and call 211 to connect to local assistance for basic needs like food and shelter.
Also add transportation, internet and cell phone to your priority list, so you can stay in touch with friends and family for help and looking for work.
“All creditors will look like they are the most important to pay,” said Amanda Christensen, a financial coach based in Morgan, Utah. “Accommodation and transportation must be at the top of the list and be given priority.”
– IF NECESSARY, LOOK FOR CHEAP CREDIT: If you need to add debt to cover your regular expenses, like groceries and utilities, financial coach Vineet Prasad of Fulton, Calif., Suggests finding the cheapest options. . “A revolving line of credit on your home equity has a much lower APR than a credit card. Another option is a personal loan from a credit union. “
To qualify for a HELOC, you will generally need an equity of at least 15% of the value of your home. And weigh the risks: HELOCs tend to have adjustable interest rates, which can make them more expensive over time, and your home is at risk of foreclosure if you can’t pay off the debt.
– FOCUS ON LONG-TERM RECOVERY: Once your situation stabilizes, focus on paying off your debts and also make saving a priority.
Consider using a debt repayment calculator that can track your debts and monthly payments. And while you might be tempted to devote all of your disposable income to paying off debt, having some money set aside can help you weather the next financial crisis.
Saving even a small percentage of your income helps, Christensen says, “If you’re not saving anything right now, see if you can hit that 1% to 5% range.
TOP HALF DEBT MANAGEMENT
If your finances have remained stable or improved in 2020, consider how you can take advantage of your situation, whether that is by making charitable donations or using some of your money to improve your finances.
And if your focus is on debt reduction, the classic earnings playbook works well: First, take stock of what you owe. Consider using a spreadsheet or an online debt tracker to organize your balances.
Then choose a repayment strategy, like the debt snowball method where you focus on your smallest debt by paying off as much as possible while paying minimums on others. Once it is paid off, roll the amount you paid on it into paying off your next largest debt and so on until you are completely debt free.
Paying off debt can be a long game. To stay focused, Prasad advises finding someone who can act as a confidant and provide encouragement.
“Getting a responsible partner who manages their money in general can be a huge differentiator for keeping up with your plan and the difficulty of paying it back over time,” he says.
EVERYONE CAN HAVE EXCEPTIONAL DEBTS
Regardless of your income or employment status, you might have too much debt to realistically pay off with a strategy like snowballing debt. If all of your monthly debt payments, including housing, are more than 50% of your monthly gross income, you may need to consider debt relief, such as a debt management plan at a debt counseling agency. nonprofit credit or bankruptcy.
The goal is to settle your debt quickly and in a way that allows you to meet your future financial goals. Otherwise, you risk spending years funneling money into insurmountable debt, sacrificing retirement, an emergency fund, and other goals.
Bankruptcy in particular can be a good option because it can help you settle what you owe in a matter of months instead of years. While bankruptcy filings fell 30% in 2020, according to the American Bankruptcy Institute, that could change in 2021 as consumers’ financial situation begins to stabilize.
To get the most out of fresh start bankruptcy deals, don’t wait so long that you can’t even afford the filing fees. Take action when you can improve your financial situation, says bankruptcy lawyer Cathy Moran of Redwood City, California.
“When you’ve hit rock bottom and things are about to get better, that’s when you want to drop,” says Moran.
Sean Pyles is a writer at NerdWallet. Email: [email protected] Twitter: @SeanPyles.