In an economy that has produced the highest inflation rate since 1981, Americans are struggling to keep up with expenses. Nearly 40% of consumers cannot put any money at all into savings, according to a recent analysis of household financial health and readiness by the American Consumer Credit Counseling. Another 19% said they had to reduce their savings rate. About 78% of Americans are living paycheck to paycheck.
As of the second quarter of 2022, 48% of consumers said the rising cost of basic necessities impacted their family's lifestyle, a steep jump from 39% in the first quarter.
In order to make ends meet, 43% of Americans expect to add to their debt in the next six months, especially young adults and parents with young children, according to a separate study by LendingTree. Most will rely on credit card debt to bridge the gap between what they need and what they can afford, the report found. Already, the rise in borrowing, together with auto loans, student debt and mortgages, propelled total household debt to a record $15.84 trillion at the beginning of the year.
When you’re drowning in debt, it can feel like the world is caving in around you. Your thoughts are swirling and just won’t stop. You’re not sleeping, and you’re worried your next paycheck won’t be enough to provide for your family. And then the questions fueled by endless worry begin: How will I make ends meet? How in the world will I cover my mortgage/rent this month? Will these debt collectors call my boss (how embarrassing)?
1. Have a budget.
Making a budget is one of the most important steps you can take. It’ll show you where all your money is going and why you feel like you’re drowning. This is your first step toward taking control of your money—and never feeling like you’re in over your head in debt again.
When you’re making your budget make sure your basic needs are met:
• Food
• Utilities
• Shelter
• Transportation
2. Cut back on the extras.
Take inventory of any automatic payments that might be draining your bank account. Maybe you have a subscription that you need to terminate.
Cutting back on non-essential items include:
• Make coffee at home instead of Starbucks!
• Cut back on your grocery bill.
• Don’t even step foot in a restaurant.
• Sell everything that’s not nailed down.
3. Pause all investing.
Saving for your future when you’re living paycheck to paycheck (or worse) isn’t the best idea. At least not yet. If you’re still trying to pay off credit cards, an upside-down car loan or a huge pile of student loan debt, it’s time to press pause on your future investments—temporarily. This frees up extra cash you can use to pay down your debt.
4. Don’t take on any new debt.
So don’t take on even another penny of debt. Having a credit card for emergencies seems like a good idea until your next “emergency” looks like your next afternoon coffee run. When you cut up those cards, you’re choosing to put an end to that awful cycle of debt for good.
5. Increase your income.
Now that you’re on a budget and you’ve decided to stop taking on any new debt altogether, it’s time to figure out how you can increase your income. Take a second job or pursue a side venture that will give you the extra income. Whether that’s working at your local coffee shop, mowing lawns, or driving for Grab.
6. Start working the debt snowball.
You’ve got some extra money coming in each month, it’s time to start paying off your debt with the debt snowball method:
• List your debts from smallest to largest—no matter the interest rate. Keep making minimum payments on all of them except the one with the smallest balance.
• Attack your smallest debt with everything you have. Throw your earnings on this debt. Keep putting anything extra you make toward this debt until it’s gone.
• Once that debt is paid, take what you were paying on it and throw it at the next-largest debt while paying minimum payments on the rest.
• Keep this snowball rolling until you’re debt-free!
7. Stop the comparison trap.
Comparison is one of the worst things you could do while you’re getting out of debt. If you’re scrolling through your news feed and see your friend on a European vacation with her mom, that doesn’t give you permission to plan a fancy vacation too.
8. Start (or keep) working the Baby Steps.
These seven steps are the proven (and practical) way to help you change your life, pulling yourself out of the debt quicksand and on to more stable ground.
Baby Step 1: Save $1,000 (or 10% of income) for your starter emergency fund.
Baby Step 2: Pay off all debt (except the house) using the debt snowball.
Baby Step 3: Save three to six months of expenses in a fully funded emergency fund.
Baby Step 4: Invest 15% of your household income in retirement.
Baby Step 5: Save for your children's education.
Baby Step 6: Pay off your home loan early.
Baby Step 7: Build wealth and give.
And good luck on your new discipline, may you rise above the worries!
References:
Nearly half of all Americans are falling deeper in debt as inflation continues to boost costs, Jessica Dickler, CNBC
What to do if you’re drowning in debt, Ramsey Solutions, 23 August 2022
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