Recent economic indicators are not positive. Our financial forecasters are seeing storm clouds of inflation and higher interest rates forming. While it all may not be doom and gloom, we might be smart to start preparing to weather a financial storm.
Know Where You Stand
Now is a good time to take a snapshot of your financial status. The first step in the journey to financial security is understanding where you are starting. You may have one or more credit card balances to tackle. Find a place to jot down those totals. Take a look at your bank accounts and see where they stand. Ideally, this is a great time to review your monthly budget as well. You may need to make adjustments for higher minimum payments and you will want to know how such an increase might impact your other expenses. Things to ask yourself: can I dine out this month or not without adding more financial stress to myself? Do I need to scale back on luxury grocery items (my fancy cheese!) until I get these cards paid off? How much debt can I carry right now?
Once you know where you stand financially, then you can make a plan.
Decide What You can Pay
Now you want to take a look at the credit card provider’s minimum required payment. Make sure you can afford to pay that amount. Ideally, you want to pay more than the minimum. The faster you can pay off that balance, the less interest you will have to pay. There are several online calculator tools that can help you determine how much interest you’ll pay and how long it will take to pay off those balances making the minimum payment. This is important information to know so you can plan future expenses. Also, it is a huge motivator for paying more than the minimum!
If you find yourself in a situation where it seems impossible to make the required payments, talk to your creditor! Avoiding the creditor and doing nothing is the wrong choice. If they don’t know you are struggling, they can’t offer you any options. If they know, they will usually work with you to find a workable solution. Remember, they just want the money you said you would pay. It is in their best interest to help you find a way to pay it. This might involve freezing your card use while balances are reduce.
Look to Increase Income or Reduce Expenses
Whenever your budget is getting tight, explore how to change the numbers. If you can increase income in some way, that can alleviate stress. Taking a second job or adding contract work like as a hired driver for an internet service can be key to financial survival. Just be careful of “lifestyle creep.” This is a term that describes how those little extras in life tend to creep into our routines once we can afford them. Things like a drive-thru latte regularly instead of making coffee at home contribute to lifestyle creep.
Another option is to reduce expenses where possible. You might reduce subscriptions to video or music streaming services to lower expenses. Maybe you decide to forgo that weekly pizza night and cook for yourself instead to save money. Is it time to cancel that gym membership we never use? There are lots of obvious and creative ways to lower those monthly expenses so you have more for debt repayment. AmericaSaves.org has some suggestions for you here.
Stock Up on Those ‘Storm Supplies’
Just like we put our hurricane supply kits together each spring, we Floridians need to start thinking about our financial supplies. The most important one is that emergency fund. Having three to six months of living expenses set aside in a savings account can keep you afloat during a rough financial storm. If you have already made a spending plan, it is easy to calculate your target emergency fund balance. Your minimum target number is three times the amount of your fixed expenses. Other supplies you might want to stock up on are those non-perishable items that are costing more and more each month. If you find a good price on garbage bags, laundry detergent or other household goods that don’t go bad, stock up. We don’t expect them to go down in price so stocking up now can provide us a future return on our investment. That return might turn out to be better than what some of us are earning in the stock market right now!
Let me be clear – this is not a suggestion to go and buy pallets of goods that will put a strain on your current finances. It is merely a suggestion to grab 2 or 3 of a reasonably priced item that you will keep until you need to use it in the future.
Power Pay Option
If you are dealing with multiple credit balances to pay off and feel a bit overwhelmed by it, check out the Power Pay option. Power Pay is a term coined by the University of Utah to describe their proven debt reduction method. This could be your best option for dealing with debt. It works because you focus on one balance at a time while just paying the minimum to other accounts. As each creditor is repaid, remaining creditors receive larger payments with freed up cash, which results in time and interest savings.
Taking the time to prepare yourself for a potential financial storm is time well spent. No one can predict the future so we don’t know if we will get a light rain or a downpour from the economy. We hope those storm clouds will dissipate like they do so many summer afternoons on the east central coast. I hope you’ll consider the benefits of preparing to weather a financial storm.