Worried about the next financial crisis? Maybe you should be. Because our economy runs in cycles with recurring booms and busts, it’s only a matter of time before our recent run of fortune fizzles out.
The next downturn could even happen a lot sooner than we think. U.S. consumer debt just passed an ominous milestone, notes Bloomberg, beating the last record set before the Great Recession of 2008. Housing prices have also been hitting all-time highs in various enclaves around the country, partly due to a surge in the building of new homes.
Whatever booms will eventually bust, and there’s nothing anyone can do to prevent this painful truth. What we can do, however, is ensure our own personal finances are prepared for an inevitable market downturn.
5 Tips To Become Debt-Free Before the Next Financial Recession
While it’s hard to say what kind of hardship the next recession will bring, there’s one step everyone can take that will put them in a better position to weather any storm.
Paying off debt reduces your financial liabilities, thus lowering the amount of money you need to make each month. With fewer financial needs to meet every month, you have to the potential to build an emergency fund or endure a loss in pay or even a job loss.
If you want to prepare for the financial worst-case scenario, the best thing you can do is pay down debt so you’re better equipped to endure the coming bumps in the road. Here’s how:
#1: Add up all the debts you owe and prioritize them.
While many people with debt might be able to guess how much they owe, it can be difficult to create a debt payoff plan or track your progress when you’re not entirely sure. That’s why the first step toward paying off debt – adding up every penny of money you owe - is the most important.
By taking a few hours to pull out all of your monthly statements and add up personal loan amounts, credit card bills, and other debts you owe, you can start figuring out the best plan of attack.
Start by getting out a single sheet of paper and creating three columns – the name of debt or bill, how much you owe, and your interest rate. Once you have all your information listed and you’re ready to face it, you can move on to the next step.
#2: Try the debt snowball or debt avalanche method.
While there is no “right” or “wrong” way to pay down credit card bills and other debts, a few different methods can make the job easier. The debt snowball and debt avalanche debt repayment methods are especially popular because they let you focus the bulk of your efforts on one debt at a time. With either method, you pay the minimum payment on all your debts except for one, throwing the rest of your money on a single debt until it’s gone.
With the debt snowball method, you focus on your smallest debt first; by paying off each of your smallest balances one by one, you can simplify your debt repayment strategy and score some “small wins” early. The debt avalanche method requires you to pay down your highest interest debt first, working your way from the most egregious high interest debt to the next until they’re all gone.
By trying either debt repayment method, you could put yourself in a good position to pay down debt faster and with a better sense of purpose.
#3: Consider consolidating your balances.
If your debts are at especially high interest rates or you want to simplify the debt repayment process, you can also consider consolidating your debts onto a single balance transfer credit card. Since many of the top balance transfer credit cards offer 0 percent APR for 12 to 21 months, this strategy can help you save money on interest while letting you pay just one monthly bill.
As you search for balance transfer cards, make sure to compare the terms of their offers and all applicable fees. The best balance transfer credit cards offer 0 percent APR for at least 15 months, no annual fee, and no balance transfer fees (or minimal fees).
Keep in mind, however, that you shouldn't use your balance transfer card for regular purchases. Only use it for the 0 percent balance transfer offer, or you risk pushing yourself into even more debt.
#4: Brutally slash your spending.
While the debt snowball, the debt avalanche, or a balance transfer credit card can all help you pay down debt faster, cutting your spending can get you toward debt freedom even faster. While reducing the amount of your income you spend every month, you’ll have more money to save or to pay toward your debts each month.
If you’re not using a budget already, start by writing down each of your monthly liabilities (bills) and comparing the total to your monthly income. Figure out how much, on average, you’re paying for rent, food, utilities, entertainment, transportation and all your other bills, then look for areas where you could potentially spend less.
Since some of your bills are fixed or non-negotiable (rent, utilities, car payment, etc.), the easiest way to cut spending is to look for the low-hanging fruit (i.e. food and entertainment spending). By dining out less, making more meals at home, and choosing inexpensive entertainment options (e.g. renting a movie instead of going to the movie theatre), you can free up even more cash to pay down debt.
#5: Track your progress.
If you truly want to get out of debt, you have to track your progress from beginning to end. If you don’t keep track of where you’re at, you’re bound to lose momentum and drop out of the debt repayment game altogether.
Let’s say you consolidated $6,000 in credit card debt onto a 0 percent APR balance transfer card like the Barclaycard Ring® Mastercard®. This card offers 0 percent intro APR for 15 months on balance transfers, following each balance transfer is made within 45 days of account opening. After that initial 15 month period, a variable 14.24% APR applies. Also, for promotional balance transfers that post to your account within 45 days of account opening, either $5 or 2% of the amount of each transfer, whichever is greater applies. For balance transfers that post to your account at a non-promotional APR after 45 days of account opening, the balance transfer fee is $0.
If your goal is paying off your debt entirely over 15 months, you’ll need to pay $400 each month to make it happen. Now let’s say you could only pay $350 one month. If you were paying attention, you would know you had to find a way to make up for it over the next few months. Fortunately, adding $10 to the next 5 months of payments could catch you right back up.
But you’ll only have the opportunity to reorganize if you’re paying attention. That’s why tracking your progress is just as important as getting started in the first place; the best way to achieve any debt payoff plan is to see it through from beginning to end.
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles. The information is accurate to the best of our knowledge when posted; however, all credit card information is presented without warranty. Please check the issuer’s website for the most current information.