A Family Debt Management Plan That Everyone Can Manage
America’s consumer debt hit a staggering $14 Trillion in the fourth quarter of 2019. We borrow money to buy houses and cars. We load up our credit cards with everything from clothing purchases to meals in restaurants. We also borrow money to pay for college educations. The concept of debt isn’t inherently bad. Very few people have the cash to plunk down on a house so that is why mortgages exist. But debt starts to become a problem when most of the money coming in has to go out to places where money has already been spent. And once it reaches a situation where bills aren’t being paid on time, debt has turned from convenience into burden.
Going completely debt-free can be a difficult thing. But you and your family might decide to slash debt and get your finances in better order. This is how you create a family debt management plan that everyone can manage.
Understand Your Debt
Debt is simply money borrowed by one person from another. The two parties agree on the amount of money that is borrowed and how much interest will be added to the payback amount. There is also an agreement about the length of time when the debt needs to be repaid. Individuals and businesses often use debt as a way to fund big purchases like homes and cars. In the end that big purchase becomes even more expensive when you tally up the interest that is owed. Debt starts to build up when you make many purchases on credit.
Credit cards may or may not be a source of debt for your family. You use a credit card in place of cash when you make purchases. Generally, once a month the credit card issuer sends you a bill for everything you bought. If you pay the bill in full before the due date you begin the next billing cycle with a clean slate. But if you only pay a portion of what’s due you are left with a balance that begins accruing interest until you clear it. Interest is calculated as an APR, or annual percentage rate.
Right now interest rates on credit cards are averaging around 17 percent. So if your purchases last month on your credit card totaled $1100 and you decide to make a payment of $100, the balance of $1000 increases by 17 percent to $170. The interest alone for the next month is now more than the payment you just made. And the interest will continue to snowball on top of itself and maybe a growing credit card balance, as well. Tackling compounding interest is at the heart of a family debt management plan.
Determine if Debt is a Problem for You
When debt is manageable the bills for that credit are paid in a timely manner each month and there is money left over for all the rest of life like housing, food, utilities, clothing, entertainment, and savings.
When debt is out of control the bills aren’t paid on time, interest accrues and there is a trickle-down effect of other bills becoming delinquent.
Stress levels become higher and credit scores go lower because of the unpredictable nature of payments. So what is a family to do? It’s time to develop a get out of debt plan.
Determine the Family’s Goals
A family debt management plan begins by examining goals. One family might want to begin by attacking the smallest debt. Another family might try to take a chunk out of the largest debt. Some families may want to completely change their spending habits. Others might hope for the lofty goal of living debt-free. Still, others may just want to raise their credit scores for the future.
Make a Plan
The first thing to do is take an honest look at just how much debt there is. This means gathering up statements and a calculator and doing the math. You can find out just what you owe and when it’s due. But you also need to look at what happens if certain debts continue to collect additional interest and penalties because of the size and frequency of the payments. For this part, you may decide that you need the help of debt management counseling.
Develop a family debt management plan that starts slowly and methodically paying down debt or a plan that attacks certain sectors of debt with a vengeance until they are gone. Once you have a clear picture of what you owe, there are a few common strategies.
Snowball Strategy
Organize your debts from smallest to largest without worrying about interest rates. Pay as much as you can on the smallest debt and the minimums on the larger debts. The idea behind the snowball strategy is that feeling of accomplishment from getting rid of the smallest debt will propel you into moving forward to pay the next largest debt and then the one after that as well.
Avalanche Strategy
In this strategy, you look at the debt with the highest interest rate and start attacking it with payments. You still make minimums on the smaller debts. The hope is that the bigger the debt you have cleared, the more money you have to keep working on the subsequent debt.
Tsunami Strategy
This strategy is a more psychological one. In this one, you pick the debt that is weighing on you the most and causing sleepless nights and pay the most on that without any regard to the interest rate. The idea here is that clearing this worrisome debt will bring you the peace and comfort to pay down the debt that doesn’t worry you quite as much.
Change Your Habits
Once your family decides which way to attack debt, the challenge is to find the extra money to make that happen. A family debt management plan may include some of these behavioral changes.
Cut Spending - This sounds really simple but it isn’t. Or you would have done it all along. Take a look at the big drains on your income. Is it too many meals in restaurants? High-end beauty services? All kinds of memberships to everything from streaming services to gyms to spray tan parlors? Carefully analyze each expense to decide if it is something that can be cut down or eliminated during the debt reduction phase.
Increase Income - Maybe this is the time to pick up a little extra side hustle. It could be as simple as offering to dog sit for the neighbors or more time-intensive like working part-time at night. You have to be disciplined enough though to funnel the extra income into paying off the debt for it to make a difference.
Stop Using Credit Cards - If credit card debt is part of the problem then the simple solution is to stop using credit cards. Everyone knows the time-honored advice to take a pair of scissors to any credit card you have a balance on. Switch to all-debit transactions so you can’t spend money you don’t have. Or consider pre-loading gift cards by the big credit card manufacturers. You won’t spend more than you’ve loaded so you can’t incur any additional interest.
Consolidate Debt - If your debt mostly involves personal loans and credit cards you may be able to consolidate it all into one single, monthly payment. These types of consolidation loans are available from private lenders and some banks. The idea is that you might be able to negotiate an interest rate on a single loan that is way lower than what you are paying each month on several different credit cards. Also just having one single payment means you are more likely to make that payment and do it in a timely manner. Less paperwork and fewer statements can mean more positive action on paying down debt.
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Student Loan Debt - This is its own category in the family debt management plan. It is possible to set up custom repayment plans for federally-backed student loans on studentaid.gov. There are private lenders who will refinance or consolidate both federal loans and private loans.
Pay on Time - Paying at least the minimum payments by the due date is one positive step toward your family debt management plan. You will still be accruing interest on the balance, but you won’t be charged additional penalties. Your credit score can also be strengthened by a history of timely payments.
Set a Budget
Your family debt management plan is going to require a budget. They are had to create and hard to stick to, but you need an accurate picture of what is coming in and what has to go out.
You have to tally:
Total available income
Total life expenses
Debt payments due
Target amount to save
This can be a very eye-opening experience for a family. Look at the large chunk that is the mortgage. Evaluate expenses like internet service and cable or dish television. Is the electric bill out of proportion? Does someone in the family have an obsession with shopping? If everyone is on board with reducing debt this process can reveal places that income can be saved to apply to debt.
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How Can We Possibly Save?
A family debt management plan ideally creates a process for saving some money. While it might be tempting during this process to throw every available dollar at debt, having an emergency cushion can save you from future debt. If the air conditioner goes out do you have to buy a new one on a credit card that is already overloaded? What if the car needs new tires? Or the family dog needs a medical procedure? It’s better to have cash on hand to pay for these things than to have to add emergencies to a credit card carrying a balance.
How Do We Get Out of Debt Quickly?
If getting out of debt quickly is your new focus in life there are some ways to jump start the process.
Pay more than the minimum amount due on your bills. Every dollar above the minimum payment helps move you faster to paying the whole thing off while reducing the amount of interest this accumulating.
Close accounts when they are paid off. If you are going methodically through a wallet full of credit cards, each time one of them hits a zero balance go ahead and close the account to eliminate any temptation to use it just once more because you can handle the new, lower balance.
Pay attention to interest rates. There is no need to constantly refinance or constantly consolidate your consumer debt. As part of your family debt management plan you need to be aware of the movement of the markets that can impact the interest rates you are paying. A big drop in interest rates could mean it’s time to refinance and reduce your interest payments.
Don’t adjust the budget. If you are successfully bringing in new income and you’ve done a great job paying down debts, don’t adjust the budget until you have reached your goals. If you have money left over, add it to your savings. You’ll be thankful when an emergency hits or you get closer to retirement.
You Did It! So What Happens Now?
You did all the right things and changed your habits and you have successfully paid down your debt. In addition to having more of your paycheck at your disposal, what happens now?
Keep Those Accounts Closed
Don’t give in to temptation and start using closed credit lines again. Let them stay in the past. You don’t need those high-interest rates in your life.
Don’t Become a Big Spender
This budgeting process should have shown you what it takes to live within your means. You have probably streamlined some of your expenses. Keep those new habits.
Pay Everything On Time
If you were in a big mess of debt your credit score may have suffered. As you’ve worked through your family debt management plan to pay it off your credit score may begin to improve. Check regularly at the big three credit monitoring services – TransUnion, Experian, and Equifax. Note any improvements as well as possible issues. Your goal is to build yourself up to a high credit score for your future needs.
Save for the Future
The beautiful thing about getting out of debt with your family debt management plan is that you have so much more disposable income. Income that doesn’t have to be distributed as interest payments on money you spent a long time ago. You can develop an emergency fund. You can take a vacation without adding it to a credit card balance. You can fund a retirement plan and feel better about the future. You can think about switching to a job you like more because you aren’t tethered to your current job by debt.
Conclusion
It is possible for your family to pay down and manage debt. It takes some organization, some determination, and a plan. Start the process by calculating all the money you owe. Make this a really honest process that includes balances on homes, cars, credit cards, personal loans, and student loans. Together, set the goals you want to achieve through this process. That might be debt-free living, minimal debt or simply raising your credit score. Develop a strategy for knocking back your debt. Maybe you’ll pick the smallest debt and chip away at that first. Maybe you’ll pick the biggest debt with the highest interest rate as your elimination target. Maybe you’ll simply pick the debt that worries you the most.
Breaking out of a cycle of debt is going to take some behavioral changes on everyone’s part. You’ll either have to spend less or earn more, or some combination of both, to have the additional income to pay down debt. You’ll need to develop a budget that lets you know how much is going in, how much is going out and how much is going into savings.
You have to move from a mindset that minimum payments are okay and really take a hard look at how quickly interest is piling up on things you might have charged to a credit card six months ago but have already stopped using. Does that restaurant meal taste better now that you have paid interest on top of the bill for the past three months? Probably not. But now that you’re living in a debt-reduced world, you probably have the cash to pay for your next meal out.