DebtHammer Newsletter #14: The Tools You Need to Become Debt-Free

According to our end-of-year survey, nearly half of American consumers planned to end 2022 in debt due to holiday spending. For many people, this was due to taking on expensive forms of credit like “Buy Now, Pay Later” plans or payday loans to cover holiday costs.

Now, already two months into 2023, many people are still struggling to pay off their holiday-related debt. This isn’t helped by the high cost of living, inflation — which was at 6.4% as of January — and other financial obligations people have.

If you’re trying to pay off debt, either because of the holidays or something else, take a moment to evaluate your situation. It might not seem like it when you’re in the thick of it, but there’s a solution to even the most financially stressful situations.

Ways to tackle your debts this year

The average American consumer owes $96,371 in consumer debt. This includes things like credit cards, auto loans, personal loans, and student loans. It also includes smaller – but still expensive debt from Buy Now, Pay Later plans, payday loans, and title loans.

It’s no secret that having debt can take a serious toll on one’s emotional and physical health. It can also result in unhealthy coping mechanisms like compulsive shopping, drinking, or gambling. In some cases, it can also lead to depression or suicidal thoughts.

If you’re ready to start tackling your debts, here are some options:

  1. Create a personal budget. A budget can help you understand your financial situation better, as well as your spending and saving habits. To make a budget, calculate your total income and expenses. Next, set some short-term and long-term financial goals (such as saving up for a down payment or paying off a credit card). Review your spending for any areas where you can cut back and start working toward those goals. Make adjustments as needed every few months or when your financial situation changes.
  2. Consider debt consolidation. If you have multiple high-interest debts (like small unsecured loans or credit cards), a debt consolidation loan could help. This type of loan lets you combine smaller debts into one bigger loan with a single, fixed monthly payment. This can make it easier to keep up with monthly payments. If the new loan’s interest rate is lower than your individual debts, you could also save money on interest charges.
  3. Take on a side gig or extra hours at work. If you’re trying to pay off debt more quickly, or if you’re living at the top of your budget, consider taking on additional work. Even working a few extra hours each week could give you more of a financial cushion.
  4. Try a debt reduction method. There are many ways to pay down debt, but two effective strategies are the debt snowball method and the debt avalanche method. See which works better for you and try it out.
  5. Speak to a credit counselor. Credit counseling is a good option if you need help creating a budget, improving your credit, or managing your debt. A credit counselor can also advise you on whether a debt settlement or debt management program is right for you.

Create an emergency fund

An emergency fund is a separate account dedicated to covering unexpected expenses like medical bills, home or car repairs, or sudden unemployment. Having an emergency fund can help keep you from falling further into debt. It can also help prevent late fees and protect your credit score and overall financial situation.

It’s generally good to have at least three months’ worth of expenses set aside for emergencies. This gives you some wiggle room if something unplanned comes up.

If you don’t currently have any money in savings or an emergency fund, it can feel daunting to set aside that much money. Fortunately, you can start small – after all, even a few hundred dollars can help in times of financial difficulty.

To create an emergency fund, start by calculating your monthly living expenses. If they fluctuate, look over your bank and credit card statements for the past several months and average out how much you’ve spent. Next, multiply your average monthly expenses by three – or three months.

For example, if you spend $4,000 in a given month, your goal can be to save $12,000 for your emergency fund. Take it one step at a time and start setting aside small sums of money each week or month. Save only as much as you can comfortably manage – be it $25, $50, or $100 a month. Over time, your emergency fund will grow into a sizable cushion.

Using Buy Now, Pay Later plans

Available through many major retailers, a Buy Now, Pay Later (BNPL) plan is a payment plan that lets you purchase an item now and pay the remainder in installments. Most BNPL plans come with four total payments – the initial one and three smaller amounts to cover the full price of the item. You’ll typically need to make a payment every two weeks.

Say, for example, you want to buy something worth $400. With a BNPL plan, you might pay $100 upfront. Two weeks later, you’d make a second payment of $100. In another two weeks, you’d make the third payment, followed by the fourth. By the end, you’ll have paid off the full amount.

It’s usually easy to qualify for a BNPL plan. All that’s needed is a simple application that asks for your name, SSN, date of birth, and some basic contact information.

The problem with BNPL plans is that some of them come with additional fees and interest, which can increase the overall cost of your purchase significantly. It can also be hard to manage them, especially if finances are already tight.

According to the Consumer Finance Protection Bureau, the average BNPL plan was $135 in 2021 — an increase from previous years. Along with this, 10.5% of BNPL plan users ended up facing late fees due to being unable to make payments on time.

Alternatives to expensive financing

If you already have a BNPL plan — or some other expensive form of financing —, the best thing to do is pay it off as soon as you can. But if you’re looking for some alternative ways to finance things when you need the funds, here are some options:

  • Use a personal loan. Personal loans usually come with better repayment terms and lower interest rates than other short-term forms of credit. You can use the funds for nearly anything, including debt consolidation or paying for a big-ticket item. If the lender reports to the three major credit bureaus, you could also build credit by making on-time payments. Just be sure the new monthly payment fits into your budget.
  • Use cashback rewards. Some major credit cards and debit cards come with cash back when you use them for everyday purchases. If you have one of these cards, consider using the cash back to fund future purchases or pay down small debts.
  • Use unspent gift cards. If you got gift cards over the holidays, spend them to cover your expenses. Don’t save them for a special occasion, use them when you need them. There is $21 billion floating around on unredeemed gift cards.
  • Ask a friend or family member for help. While you might not want to make a habit of this, you could ask a loved one for a small one-time loan. These loans don’t usually come with interest or other fees. Plus, they’re flexible. Be clear on the repayment term and how much you need, though.
  • Start a savings account. Unlike an emergency fund, a savings account is meant for specific things like a down payment on a house, preparing for vacation, or planning for the holidays. Set a personal financial goal and set aside a small amount each month — ex. $50 or $100 — into a separate high-yield savings account until you reach it.

Looking ahead to the rest of 2023

BNPL plans and other expensive forms of financing can set you back financially, even if it doesn’t seem like it at the moment. But by implementing some of these strategies, you can start paying down debt and potentially improve your financial situation in the long run. Start small and don’t hesitate to reach out if you need help.

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