Managing Finances to Reduce Debt

Here we are, on the last day of August, and the disruption to daily life from the pandemic is still going. Did you think we’d still be in this state six months after it all began? I certainly did not. I thought it would be 3 months, 4 months tops, and life would be back to normal. 6 months later, though, and there are still people without jobs. Some businesses have reopened, but on a much smaller scale and with business models and services that look much different than they used to. Restaurants can’t have as many patrons as before. Shops are limited on how many people can be inside at once. Weddings are super small scale. Masks are required to be out and about. Everything is so different and almost everyone has been impacted in some way.

For the last couple weeks, I’ve been walking at night with a friend. She and her husband have lived in their home for four years. They have a 7-year-old daughter. My friend and her husband both used to have jobs and their little girl went to school. Now her husband’s job has been scaled back and he makes half as much as he used to. Schools were shut down and her daughter was no longer in school. Daycares were closed. Her family helped watch her daughter for a while, but things changed for them, too, and they are no longer able to watch her. My friend had to quit her job because someone needed to watch her daughter. Their family did okay for a little bit. But she hadn’t been at her job long enough to qualify for unemployment. Her daughter developed sensitivities to some of the food being given out in the free pantry boxes around the neighborhood. They had to spend more on food that didn’t make her sick. August rolled around and my friend couldn’t pay rent. She’s super stressed because rent is due again tomorrow and they can’t pay September rent. With their limited income over the last several months, they’ve been forced to pay bills on their credit cards, credit cards which are now maxed out. She doesn’t know how they’ll be able to save enough to pay October’s rent if things stay the way they are. 

This story is sad and it is heartbreaking. It’s the same story millions of families around the US, and the world, are experiencing. It sucks to not be in a position to help. I wish I could help. Not just my friend, but others who are struggling. But I’m barely getting by, too. I’m fortunate that my situation isn’t as bad as it could be. I’ve truly been blessed. I was taught at an early age how to budget, how to save, and how to manage my finances. I got into some debt 15 years ago when I first got married and we combined finances, but I got things taken care of, paid off all my exhusband’s past due bills, paid off all his credit card debt, and paid off all the credit card debt we’d accumulated together. I figured out our budget and made a plan. We were debt free in less than 2 years. We bought a car a year later and after the divorce, that was my only debt. I paid the car off in 2012 and since then, my only debt has been student loans. I still use a credit card, but pay it off every month. I use it because I get points and rewards that I use regularly. But other than that, I have no debt. I don’t like debt. It feels like a shackle. 

Debt Is Sometimes Unavoidable

While I don’t like debt and I don’t have much, I can understand how people get into debt. It’s so easy to use credit cards for things you want now instead of saving up for them. And credit cards can be a lifesaver when emergencies arise. Like now. During this pandemic. Sooooo many people are being forced to use their credit cards for basic living expenses just so they don’t have their water and power turned off, so they can put gas in their car, so they can keep groceries in their refrigerators. Credit cards are helping people keep afloat right now. The downside is that payments are still due. Limits are only so high. And Late payments and interest rates compound. It’s a vicious cycle of necessity at further sinking. 

Debt Can Be Overwhelming

What I’ve heard from a lot of people about these topics is that they don’t know how they’re going to get out from under the debt or how they spend so much each month. A lot of people don’t know how to figure this stuff out and how to make a plan for tackling the debt. Sometimes the knowledge of how dire the situation is can be paralyzing. If you’re one of these people, I get it, I really do. 

Budgets Help Manage Debt

Back when I was in debt when I was first married to my exhusband, I felt like it was too much and we’d never get out from under it. What saved us and helped get us out of debt was making a budget and sticking to it. Debt can be intimidating and stressful, especially in the current climate, but things will only get worse if a plan isn’t made now. Take some time and really figure out what your debts are and how much you spend on different things each month. Be honest. 

If you need some help, use an online budget planner to help you come up with different categories and play with numbers. It will walk you through different expenses and help you make adjustments where needed. If you’re unsure about what to allot for different categories, check out this budget assistance tool. You can enter your current total income and it automatically calculates how much you should be spending in each area based on recommendations by financial experts. You can adjust different percentages to reflect how much you currently spend in each category. This will help you see where you need to cut back and just how far over your income you really are.

Budgeting Step 1: Determine Cash Flow

But before you get into all that, the first thing you should do is figure out your cash flow. You can’t really know what to aim for if you don’t know what you have. Your cash flow is any income you’re bringing in. This can be a paycheck, unemployment, donating plasma, babysitting, doing any of the delivery or driving services, alimony, child support, disability. If it brings money into your home, write it down. The IRS isn’t going to see it and your tax person won’t see it. This is just for you, so be honest and make a complete list. 

Budgeting Step 2: Calculate How Much Cash You Have

Another thing you need to be sure to write down is all your bank account balances. How much cash do you currently have? This will be your checking accounts, savings accounts, money market accounts, prepaid card balances, cash on hand, etc. If it is money you own and have free access to, write it down.

Budgeting Step 3: Write Down Your Debts

The next thing you need to do is write down all your debts. Debt comes in many forms. This will be credit cards, store cards, store lines of credit, the tab at the bar, medical bills, student loans, car loans, home loans (rent doesn’t count), payday loans, etc. Make a list of the balances, payment dates, monthly payments, and interest rates for each one. 

Budgeting Step 4: List Your Expenses

After that, make a list of all monthly expenses. This can be rent, utilities, gas, groceries, car insurance, cable/internet, prescriptions, cell phone, savings, storage unit, water/sewer/trash, yard care, car maintenance, charitable donations, child support, alimony, hobbies, box subscriptions, streaming services, post office box, childcare, streaming services, savings transfers. If you pay for it or it comes out of your account, write it down. 

Budgeting Step 5: Do The Math

Now, add up your monthly debt payments and all your monthly expenses. Subtract that from your monthly income. What are you left with? Is it a positive number or a negative number? If it’s a negative number, you’ve got some work to do. If it’s a positive number, yay! Good job! Now let’s see if you can trim some stuff down.

Budgeting Step 6: Reducing Expenses

To figure out where to cut expenses, the first thing you need to figure out is what are payments that you HAVE to make every month. These are your essential bills: rent, utilities, water/sewer/gas, debt payments, child support, alimony, food, gas, etc. Everything else is considered non-essential.

If the totals for your essential bills total up to less than your income, then you’re okay. If not, you need to look at what you can change. Can you buy generic products? Can you cut back on the amount of snacks you buy? Would it be cheaper to use different light bulbs? Can you do better at turning off lights and electronics when not in use? There are tons of ways to reduce expenses if you’re willing to put in the effort. 

Questions To Ask Yourself

As for your non-essential expenses, this can be both easy and hard to manage. Honestly ask yourself these questions: 

• Do you really need every streaming service? Cut it down to just one.
• Do you need monthly box subscriptions? Might be best to cancel all of them for now or put them on hold.
• Do you need monthly gaming subscriptions? This one can be touchy. If it fits in your budget to keep one, then keep one. If it doesn’t, put it on hold for three months and then see if it fits in the budget.
• Can you cut expenses on your hobbies? Look at what you already have for your hobbies and find out how to make that work. See if you can get items cheaper from a different source or make do with what you have.
• Do you need to eat out as much as you do? If making lunches to take to work is a challenge, look at buying frozen meals or other preportioned food products. These are usually cheaper and healthier than fast food. Save eating out for a once-a-month treat if it fits in your budget.
• Do you need as much alcohol? This one can be touchy, too. People like having their alcohol for relaxation and having fun. Look at buying less or changing to a less expensive brand. 
• Do you need to go out to movies? Seeing movies is fun and provides a break from life. Look at renting from Redbox and making your own movie experience. One of the things my fiance and I do is take a movie, a laptop, pillows, and some blankets and drive somewhere. We lay the seats in his car down, arrange the pillows and blankets, set up the laptop, and have a little movie night in his car. We bring popcorn, sliced apples, cheese, crackers, candy, and drinks. It’s fun, romantic, and super cheap. 

More Things You Can Do

Some other things to consider are:

• Use your cash on hand to pay down debts. Sometimes it’s better to pay a high-interest bill than to have the extra cash in savings. With interest rates as low as they are right now, the money in your savings account isn’t doing much for you. High interest rates can add up quickly, which is why it might be better to take some of your savings to pay down some of your debt.
• Look into side hustles. You can look into Uber, Lyft, Postmates, Grubhub, Uber Eats, ridesharing, online tutoring, grocery delivery, babysitting, pet sitting, delivery driving, blogging, product reviewing, selling stuff you don’t use anymore. There are lots of ways to bring more income into your home. Find something that works for your situation and give it a shot. Just don’t sign up for anything that requires you pay a ton of money upfront and then make money off getting other people to sign up. That stuff rarely works out for people.
• Consolidate debt. If you have a lower-interest credit card that has room, look at transferring some of the balance from a higher-interest card. This will help you pay down your debt faster because interest won’t be adding as much to your balance each month.
• Call your credit card company to ask what assistance they can offer you. Many credit card companies are working hard to help their customers stay on top of their debt. They want you to pay off the debt so they don’t lose money, so they’re more willing to reduce interest rates, lower monthly payments, and offer low-fee and no-fee balance transfers. But you won’t know what your bank is willing to do to help you if you don’t make the call.
• When you pay off one debt, use that money to pay down another faster. If you have five credit cards and you pay one off, take that monthly payment amount and add it to a payment on another bill. This will reduce your debt faster. When that bill is paid off, take the monthly payment amount from both paid off bills and add it to the payment on another. This is called snowballing. It helps pay off debt much faster than just paying the minimum alone. And it helps you see a bigger reduction in your overall debt, which is a really great feeling.

Cutting out the fun stuff can be hard. But if you’re struggling to pay your rent and provide food for your family, make the sacrifices you need to. Cut out the non-essentials now to make sure you have what you need to take care of yourself and your family. It may take a few months to a year or two to get finances back under control with how things are now, but it’s 100% worth the effort. And then when you have more income, you’re set up to cut your debt down faster and save for a home, a new car, a big trip, or something else you’ve always wanted. I know it can be hard and I know it sounds daunting. I’ve been there. It can be done and you can do it. Start now and get on that path. Push through the hard time of less fun and less  Before you know it, you’ll be out of debt and able to back to the fun things you’ve had to put on hold. Just make sure that you keep things within your budget.