Debt payment could be the farthest thing in your mind right now but you need to start thinking about it. Times are hard now more than ever because of the pandemic. A lot of businesses had to let go of people. Some were even forced to shut down because they were not able to recover from the losses they absorbed.
The health crisis forced the economy into some abrupt changes leaving a lot of people out of jobs. Some are on furlough and others are working from home. Regardless of what your situation is at the moment, your finances could have been affected by recent developments all over the world.
As a result, you might be stretching out your finances too thinly at the moment. If this is the case, debt payment is surely something you need to be thinking about. It will be tough especially if you are still struggling with your income but it needs to happen. You cannot put it away for a long time.
This is an important topic you need to pay attention to especially as Forbes shares that 36% of Americans could not access $400 in an emergency situation at the start of the pandemic. This is troubling especially that the events that followed that were unemployment and high credit card reliance.
Why do Debts Accumulate
To help find a way to make debt payment possible, you need to understand where they are coming from. If you have a better idea what is causing your problem, you stand a better chance of identifying a solution.
Unforeseen Emergency or Financial Crisis
On top of mind, this is the first thing you will think of when you try to understand why you are in debt now, or at least, more than before. The on-going pandemic has given rise to many families facing unprecedented financial emergencies. This is true especially for those who are still in limbo when it comes to their employment.
This is a lot more challenging for those who did not save up and doesn’t have any form of an emergency fund. If this is the case, you would then have to start relying on whatever account you can get your hands into. This could be investments or savings you need in the future such as retirement funds or even college savings for your children.
You could also begin tapping into your credit card and maxing them out sooner than you would have wanted. It just keeps getting bigger and bigger since you cannot pay the full amount every month. Next thing you know, you are taking out high-interest loans just to stay afloat and cover all your expenses.
Bad Debt out weight Your Good Debt
Debt payment is challenging especially when it is coming from bad debts. And yes, the existence of bad debts means that there are also good ones out there. The question now is how would you know which is which? This is because most consumers were taught to try and stay away from debt as much as possible.
Bad debts are financial decisions you made that put an additional strain in your budget without much benefit in return. It could be buying a brand new car with huge monthly payments. If it’s just collecting dust in your garage, it has no value for you. But if you bought a vehicle and you are able to use it to bring income to your budget, then that is good debt.
Your mortgage is also considered a good type of debt simply because the more you pay for it, the higher your equity becomes. And that equity is an asset you can use in the future. You can even tap into this equity in times of extreme need.
Emotional Purchases vs Rational Purchases
Your emotions play a big part in your purchasing habit. This is the reason why you should never make purchasing decisions when you are happy and sad. You tend to channel your emotions through your purchases. When you’re sad, you might turn to retail therapy and when you’re happy, you could be spending more than what you had planned.
How to begin with debt payment
Now that you have an idea of why you accumulate debt, here are ways to help you start making debt payments.
Create a Financial Strategy
The first agenda you need is to create a strategy. This can be as simple as creating or revising your current household budget. When creating your budget, the idea is to put in your income sources on one side and your expenses on the other. At the end of the list, the goal is to have enough income to cover your expenses.
If you are having a tough time making this happen, you need to start making changes on either side. The easiest would be to cut down on costs. Using your budget list, you would be able to figure out areas you can trim down. There are a lot of ways to help you cut down on costs and it is up to you to choose which area you will focus on.
Change your Spending Behavior
While you are trying to lower down your expenses, it is a good idea to make positive changes in your spending behavior as well. This way, you are able to sustain your actions. Treating the behavior and changing for the better helps you treat the problem directly. This is because at times, people tend to address the symptoms and not the cause of their financial troubles.
Debt payment is important at this stage but you also need to address underlying factors that make you overspend. You could be paying your credit card debt every single month but fail to realize that you are overspending because of certain behavior. You might be using credit to buy unnecessary items you do not need just because of a sale. It is also possible that you just want to buy food rather than cook because you do not know how to cook. This is a great time to learn how and you not only save money you get to eat healthy as well.
Increase income to start debt payment
As mentioned earlier, debt payment is easier if you can find a way to increase your income every month. This can be a challenge, especially as USAToday shares that over 40 million Americans are out of a job because of the recent crisis. Trying to increase the income coming in every month will surely be a big task for people who are laid off from work.
But this does not mean that it is impossible. For one, you need to start applying for unemployment benefits. This can be a big help especially if you do not have any money coming in. Next is to tap into your emergency fund to help you cover for your expenses every month. Another idea is to consider income positive hobbies.
Know also that there are industries that are not only able to sustain operations but hiring as well. These are usually businesses providing essential services even at the time of the pandemic. You might think they are not in line with your career path but it is more crucial to have a stable source of income at the moment. Consider also starting a business idea at this time. It might not sound feasible but this could be a good time to start.
Debt payment might be far from your mind at the moment but you will have to do it sooner or later. The sooner you plan for it, the better you can meet your financial obligations and keep your finances from being a huge problem for your household.