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Published on August 28, 2020

10 Recession-Proof Debt Consolidation Tips

10 Recession-Proof Debt Consolidation Tips

The journey to paying down your debt can be challenging in the best of times. It can be even more complicated when you’re balancing the effects of a global recession.

Many Americans are facing immediate financial uncertainty from losing their jobs or being underemployed. The economic repercussions of this pandemic recession will be felt for years to come. Although becoming debt-free might not be your top priority during this difficult phase, you should still take steps to maximize your money.

Here are some debt consolidation tips to help recession-proof your finances.

1. Ask Your Creditors to Lower Your Interest Rates

The first on this list of debt consolidation tips is asking your creditors to lower your interest rates. Many borrowers don’t realize they can contact their existing credit card providers at any time to request a lower interest rate.

This often-overlooked tactic is a quick and easy way to reduce your debt burden, and it may result in a permanent or temporary (e.g. 12 months) interest rate reduction.

Creditors are more likely to say “yes” if you have a history of on-time payments or if your credit score has recently increased. Even if that’s not the case, the worst thing your creditor can do is say “no.”

If you aren’t successful in lowering your interest rate, don’t hesitate to ask again after a few months or after receiving lower offers from competitors. Credit card providers can issue reductions at their discretion, but it’s up to you to initiate the request.

2. Pause Low-Interest Loans to Tackle High-Interest Debt

High-interest loans and credit cards can prevent you from climbing out of debt. Although you’re hard at work making payments, interest charges are continuously accruing. This interest can quickly eat away at your monthly payment instead of chipping away at the principal balance.

To help make some headway in repaying your debt, see if you can pause payments on your lower interest loans. Then, devote those funds to your higher-interest debt. This lets you eliminate your balance faster and save you from unnecessary interest charges.

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Options for loan deferment vary by lender. In some cases, lenders might offer an interest-free deferment. Other lenders might continue charging interest on your loan during deferment.

Contact your lender to determine if deferment is available and for how long. Even a pause of two to three months can help you put a noticeable dent in your high-interest debt.

3. Consider Using a Balance Transfer Credit Card

You can quickly reduce your overall interest by taking advantage of low or 0% APR balance transfer credit cards. By transferring your existing balance from a higher interest card, you can save money and pay down your balance quicker.

A low-interest rate or promotional offer, however, might come with an additional cost in the form of a balance transfer fee.

For example, a creditor might offer 18 months of 0% APR when transferring a balance from another card. This perk typically comes with a 3-5% balance transfer fee that’s calculated based on the transfer amount. In this scenario, you could tack on up to $300 to $500 in transfer fees if you transfer an existing $10,000 balance to a new card. You’ll need to weigh your potential savings versus the transfer fee to determine if this is a good debt consolidation strategy.

Additionally, your new card might have transfer limits or a short introductory period before a higher interest rate kicks in on any remaining balance. Be sure to read the fine print and stick to your repayment strategy, so it doesn’t end up costing you more in the end.

4. Refinance With a Lower Interest Rate

Whether it’s your mortgage, student loans, auto, or other consumer debt, you might find a lower interest rate by refinancing your loan. Refinancing is one of the most helpful debt consolidation tips you should know.

Refinancing replaces your existing loan with a new loan—usually with a lower interest rate or better terms. You might qualify for a better rate than when you originally took out the loan if your credit score has since improved or if consumer loan rates have dropped.

Mortgage and student loan refinancing rates are at record lows since this pandemic began, which is a small silver lining in otherwise tragic health and economic crisis.

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The bottom line is if you can find a lower interest rate for any of your loans, take action. Remember, there might be associated refinancing fees or closing costs depending on the type of loan and lender.

5. Ask About Loan Modification

In some cases, you can benefit from modifying an existing loan instead of refinancing it into a new loan—particularly if you need immediate relief due to financial hardship.

Depending on the type of loan, the refinancing process can take months, as is the case with some mortgage refinancing options. Loan modifications, however, can be processed in a short period.

Loan modification can make your payment more manageable by reducing your interest rate or lowering your monthly payment. It can also extend your loan terms, which typically costs you more money in the long-run.

Contact your lender to explore loan modification opportunities. Always make sure you fully understand the terms and structure of your modified loan before moving forward.

6. Shop Around for the Best Loan Consolidation Quotes

If you have high-interest debt, you may be able to consolidate multiple balances into one low-interest loan. This can save you on interest fees, but it can also streamline your payments into one due date, which can prevent missed or late payments.

It’s best to grab quotes from at least three lenders any time you’re consolidating or refinancing your debt. By comparing multiple offers, you’re getting the best current rate since lenders are competing for your business. I recommend shopping around for all types of loans, especially for better student loan rates.

Student loan debt, totaling more than $1.64 trillion in both federal and private student loans, surpasses all other forms of debt in the U.S. apart from housing debt.[1] Because of this, there are plenty of opportunities to refinance or consolidate your student loans.

If you already have private student loans, you should be shopping around for better interest rates at least once per year. Lowering your interest rate is the priority, but also compare origination fees, repayment terms, and any available cashback offers to pay down your debt further.

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If you have federal student loans, the decision gets more complicated. Depending on your financial situation and career goals, it might be more advantageous to keep your existing federal student loans due to their various protections (e.g. deferment and forbearance), flexible income-driven repayment plans, and available forgiveness programs.

7. Work on Improving Your Credit Score

Before consolidating a large amount of debt, take steps to improve your credit score. The higher your credit score, the better interest rates you’ll be offered.

Common ways to improve your credit score include:

  • Disputing any errors or outdated information on your credit report
  • Paying off smaller credit cards and keeping your loan balances low
  • Refraining from applying for new credit accounts in a short period
  • Keeping revolving credit accounts active

These actions can help lower your credit utilization rate while maintaining your credit history length. Both are important factors in determining your credit score.

8. Cancel Any Small Credit Cards After You Consolidate Debt

Another often overlooked debt consolidation tip is canceling small credit cards. If you use a debt management program or a debt consolidation loan, you might be required to close certain credit card accounts as part of the agreement. This gives the lender more confidence that you won’t run up new balances and increases the likelihood that you’ll repay the debt.

Even if you choose a different method of consolidation, it’s a good idea to cancel your smaller or newer credit cards by choice—or cut them up—to discourage you from using them.

9. Run a Credit Check to See If You Forgot About Any Debt

With endless opportunities to borrow money, payments can slip through the cracks. Check your credit report periodically to ensure you haven’t forgotten about a small loan or debt.

For example, you may find that a medical bill has been sent to collections without ever physically receiving a notice because it was sent to a previous or incorrect address. Perhaps you simply forgot about a loan that has an old email on file. You could be in default without realizing it.

You’re entitled to one free copy of your credit report from each of the major credit reporting companies—Equifax, Experian, and TransUnion—every 12 months.

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By keeping an eye on your credit report, you can head off any surprises and actively resolve any financial issues that arise.

10. Sign Up for a Budget-Tracking Service

An often overlooked debt consolidation tip is signing up for a budget tracking service. It’s easy to become detached from your money when you’re swiping your credit card instead of paying with cash. This psychological separation leads to overspending and more debt.

Free and paid budgeting tools can help you reconnect with your finances and keep you accountable along your journey. Platforms, like Mint or You Need A Budget (YNAB), can help track your expenses and give you a big picture view of your finances.

There are many free and paid budgeting tools out there, so find one that matches your financial needs and goals.

Debt Consolidation Efforts Won’t Solve All of Your Problems

Although these debt consolidation tips can help you save on interest and streamline your debt payoff strategy, it’s only one piece of the financial puzzle. If you’re spending more than you’re earning, you’ll continue to get trapped in the debt cycle.

Start by setting a realistic budget, which might include significant lifestyle changes. You might need to trim down some of your expenses or find a way to bring in additional income. By relying less on credit to make ends meet, you’ll reduce the likelihood of repeating the debt cycle.

More Tips for Better Financial Management

Featured photo credit: Sharon McCutcheon via unsplash.com

Reference

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Travis Hornsby

Founder & CFA, Student Loan Planner

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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