When it comes to money management, a lot of people lack the skills and the knowledge to do it right. Throw some debts into the mix and the scenario gets even worse. Let’s face it, nobody is truly an expert at managing debts. It can be a tedious task in times of financial stability, but it can be an absolute burden during recession. However, we don’t have a crystal ball to look into that will accurately predict when economic growth will stop and recession will hit. It’s an inevitable event that happens from time to time and there’s no way to foresee how long it will last or how bad it’ll be.
In the current situation, when the world is dealing with the economic crisis caused by the coronavirus pandemic, recession is once again a pressing issue. If you have the misfortune of entering the period of recession with a lot of debt, you must learn how to handle your finances if you don’t want things to spiral out of control.
So, what can you do if you carry debt and recession is at the door? Survival is the name of the game. If before recession paying off your debt as soon as possible was a priority, now you must approach matters from a different angle. It’s all about focusing on the essentials and ensuring financial security until the threat is over. Here are 5 tips to help you manage debt during a recession and keep your financial and mental health intact.
Make minimum payments
During recession, ensuring a steady cash flow is the golden rule. This means you should put off your plans of living a debt-free life for now and focus on having enough money on your hands to make it through. Making extra payments to reduce the amount of money you owe is out of question.
But just because reducing or eliminating debt completely should no longer be your top priority, it doesn’t mean you should forget about paying you monthly installments on time. Falling behind with debt payments will only make matters worse. The last thing you want is having your creditors come knocking on your door. Your goal for the moment should be making the minimum payment on your debts and you must stick to this plan until you’re out of the woods.
Learn to prioritize
Covering all your essential expenses such as utility bills and having enough money for food are obviously two of the most important things you should check off your priority list. If your budget allows you to pay for housing, food and utilities, you can consider yourself lucky. But you must also learn to prioritize debts repayment as well, since they’re not all on the same level. Debts with higher interest rates should always come first.
For example, credit card debts can put a lot of strain on your finances as they come with high interest charges that tend to pile up until your budget can no longer support them and you find yourself in a critical situation. Therefore, it’s a good idea to put them first and then move on to other types of debt such as mortgage or student loans. Needless to say, you should refrain from using your credit card for spontaneous shopping sprees. Recession is a time of frugality, not of hedonism.
Learn about debt consolidation
Handling a couple of loans can be stressful. Handling multiple loans from various sources can be a nightmare. With different creditors, different interest rates and deadlines, keeping up with debt payments can feel like a labyrinthine process. A simple and effective solution would be considering a consolidation loan to gather all of your debt under one umbrella, be it credit cards, payday loans, installment loans etc. Not only it will make managing your debt a lot easier, but it can also help you reduce monthly costs as it will reduce your interest rate.
Of course, there are also some disadvantages to take into account, such as a longer repayment period which will translate into higher interest payments. But if you take the time and analyze loan options from different lenders, you can find a solution that works for you. Just make sure you understand all the terms and conditions before taking a loan and signing an agreement.
Cut back on your spending
This step won’t make your debt issues disappear, but it will make it a lot easier to live with them until recession is over. If you were used to a lavish lifestyle while the economy was flourishing and your debts were not something to worry about, now that they’ve become a serious burden it’s time to reconsider your habits. The wisest thing you could do is cut back on unnecessary expenses.
Easier said than one, especially for those who never had to plan their monthly budget and count every penny that goes in and out. Well, recession is a great teacher and you’ll get proficient at budget planning in no time once you realize that your financial resources are running low and you’re slowly drowning in debts. Make a list with all your urgent expenses and keep away from spending money on mundane pleasures such as dining out or going on holiday for a while. You can learn to live without a lot of things when times are desperate. Remember it’s not forever, but these small changes can help you keep your head above the water.
Tap into emergency savings
Some people were cautious enough to build an emergency savings fund when everything was bright and shiny on the economic stage. Admittedly, not everyone can afford saving for a rainy day, but if you are one of those lucky fellows who could, now it’s time to tap into those funds. It’s hard to watch your hard-earned money fly out of your wallet, but you can’t hold on to them forever when there is zero cash coming in and your debts keep piling up. There’s no saying when a recession period will end, so if your financial situation is getting worse by the day, you should use the money in your emergency savings account to help you manage your debts.