The Covid-19 crisis has had disastrous effects around the globe. From health to finances, the pandemic has had a serious impact. However, there are some good takeaways we can get from this crisis, especially when it comes to financial planning and debt management. Much of this advice applies not only for today but for the future, as well – whether times are prosperous or not.
Read on to find out more about the things we have learned from the pandemic in regards to debt management.
The Covid-19 Financial Crisis
The unexpected job losses associated with the Coronavirus outbreak were unexpected in 2020. We’ll likely be feeling the effects of this pandemic for at least another calendar year. For millions of Canadians whose businesses have been forced to shut down temporarily or permanently, personal finances have taken a huge hit.
Many Canadians have found themselves facing an unexpected debt crisis with little opportunity to overcome it. There are plenty of financial tips we can learn from this.
10 Financial Debt Management Tips We’ve Learned So Far
Financial debt management and financial planning has taken on a new viewpoint this past year. Here is a closer look at the things we have learned from this crisis.
1. Why Managing Debt is Important
The Covid crisis has taught us that tough times can come when you least expect it – and they can come on quickly. One day you may be financially stable, and the next you can barely make ends meet. If you were paying your debt slowly and not prioritizing your debt management, you now know that debts shouldn’t wait for later. We never know what later has in store.
Covid-19 has taught us why managing debt is important. If you don’t prioritize paying down your debt today, you may be stuck with insurmountable debt and no job tomorrow. Don’t always assume things will stay exactly as they are. Plan ahead, make paying your debt off your primary goal, and make sure to keep a contingency fund.
2. That Financial Planning is Essential
Have a financial plan is crucial to financial success. A good financial plan should include a savings plan, in which a portion of your income is put into a savings fund in the event of an emergency. Without a financial plan, consumers are very likely to forego saving and spend most of their income needlessly. A financial pan keeps you on track and can help you plan ahead for potential disasters.
Financial planning can include investment planning, estate planning, and day-to-day budget planning. In order to be prepared for a huge financial crisis – whether globally or personally – a concrete plan that allocates funds for saving is very helpful. If you are currently in debt, it’s not too late to build a financial plan for yourself. If you don’t where to begin, meet with one of our experts today to find out how you can plan ahead for your future.
3. That What You Have is Not Equal to What You Can Spend
Unfortunately, many Canadians are learning the hard way that having $100 doesn’t mean you can spend $100. Spending every penny that comes in, with nothing to save, means you are living above your means. This puts you at very high risk for accumulating debt. If you happen to lose your income, you will not be able to sustain your lifestyle.
The Covid-19 crisis has really highlighted how important it is to live below your means so you don’t risk falling into debt so easily.
4. Work on Money Management Skills – Always!
Having a good income can tempt you to spend. In fact, it may even tempt you to spend on things you don’t really need. Whether you are living through a crisis or not, practice money management skills. Ask yourself if each purchase you are about to make is necessary. Would you follow through if you didn’t have a job? If the answer is no, maybe you can do without.
Practicing money management skills regularly will help reduce your urge to spend. So if you do hit hard times, resisting the urge to shop won’t be nearly as difficult as it has been for so many consumers this year.
The idea it to get you to spend less and save more, no matter how much money you are bringing in. The truth is that we never know when that well may dry up. And eventually, even our contingency funds may dry up. Can you manage to live if all of that happened tomorrow?
5. Investing is for the Long Term
If you were investing in the stock market when you were earning a good salary and now find yourself unable to make ends meet, you’re not alone. The truth is that the stock market is for people who can really do without their regular paycheck. If you have invested too much of your disposable income in the stock market and you suddenly need it back, you are going to face huge losses.
The stock market is for those who are not planning to use that money for years, maybe even decades. It may seem tempting to invest but if you are still establishing your financial success, investing in the stock market is not ideal.
6. Prioritize Clearing High Interest Debt
High interest debt, like credit card debt, is the worst debt to have. If crisis hits and you owe a large sum of money that is increasing with interest by the day, you will have a tough time coming out from under it. At this point, you will definitely need to secure a loan to debt management. Consumers should making reducing or eliminating their high interest debt as quickly as possible.
It is also important to try to clear unsecured debt versus secured debt. Your mortgage is a secured debt. You may want to pay it off, but it isn’t harming your credit. You maxed out, unpaid credit card however, is hurting your credit score every single day. If you find yourself unable to clear your high interest, unsecured debts, call BHM Financial for help.
7. A Pandemic is Not a Good Time to Incur More Debt
If you have unsecured consumer debt, this is not the time to saddle yourself with another loan, whether secured or unsecured. The idea is to keep your level of debt low during this period of uncertainty. We are still unsure how things will unfold over the next year or two. It is crucial to minimize debt and avoid making new debts until things stabilize.
If your debt grows and you suddenly lose your job or taxes increase substantially, you may find yourself unable to pay. To be safe, give it another year before replacing your car or moving into a larger home.
8. Most of Our Expenses Are Non-Essential
As non-essential businesses, like restaurants and bars, have been closed for months, we see that suddenly that morning coffee and bagel wasn’t as essential as we thought. Without social gatherings and parties and social events, most of us are spending way less than usual. The only bills that haven’t changed much are essentials, like the mortgage or utility fees.
When times are better, you can enjoy the occasional fancy coffee. But you now also know that you don’t need it every single day. Instead, you can cut back on your long-term spending habits and save up a little bit more.
9. Rash Financial Decisions Are Never Good
If you are quick to make a big purchase or swipe that credit card without giving it a second thought, you’re likely now in a position where you may not know how to pay down your debt. Making rash financial decisions rarely has a positive outcome. Instead, take your time and think it through. You never know when your financial situation may change or how. So make decisions that won’t leave you in financial ruin should a crisis occur.
10. A Debt Management Plan (DMP) Can Help
If you’ve tried managing your debt on your own, but now find yourself feeling even more stressed out as the crisis continues, it’s time to seek help. A professional at BHM can help you build a DMP that works for your needs. We want you to pay down your debt as quickly as possible, maintain good credit, and lead a debt-free life afterwards.
How to Get Out of Debt in 2021
Managing debt is always important, but it is especially important during a financial crisis. Here is everything else you need to know about debt, how to manage it, and how to get out of it for good this year.
What are the Advantages of Debt Consolidation?
There a couple of very important advantages to debt consolidation. The first pro is that debt consolidation offers you a lower interest rate than credit cards. This means you can pay your debts off quicker, for less. Reducing your interest rate is a key step in reducing your debt quickly.
The second great advantage to seeking debt consolidation is that is can actually help raise your credit score over time. When your loans are consolidated, high interest debts are cleared. Credit card debt affects your credit rating, as does your inability to pay your monthly payments. With only one reduced payment to make, you minimize your risk for default. If you make your payments on time, your credit score will continue to improve.
Which is Better: Debt Management or Debt Settlement?
Managing your debt is always better than settling it. It you can get your debts consolidated so you can pay them off easier, it is always best. Debt settlement means part of your debt is forgiven. However, debt settlement can have a detrimental effect on your credit report. Debt management may take a little longer, but it will have a smaller impact on your credit rating.
When it comes to managing your debt, you want to find the solution that strikes a balance between quickly paying off your debt and maintaining your credit. Poor credit can have disastrous effects on your future. It can prevent you from securing low interest rates, safe housing, a mortgage, or even stop you from getting a better, higher paying job. The goal is to reduce your debt and keep your credit in good standing at the same time.
How Does Managing Debt Reduce Financial Risk?
Because debt consolidation can reduce your payments and make your debt easier to manage, your credit will remain intact. Anyone who checks your credit, such as a potential employer or car dealership, will base their decision on whether or not you are considered a financial risk. Frequent late payments or unpaid bills can tell lenders and employers that you are a risky candidate. Managing your debt properly can protect your credit so you don’t miss out on job opportunities.
What are the 5 Recommended Steps for Getting Out of Debt?
Once you find yourself in debt, how do you get out of it? Here are the five main steps to getting out of debt:
- Set a realistic goal: Your aim should be to pay down your debt as quickly as you can. This includes avoiding setbacks by setting goals you can attain. If you aim to pay more than you can afford, you’ll find yourself falling off track and losing control of your debt.
- List your debts: Take a look at your debts on paper and calculate the interest rates you are paying on each one. This can help you manage your payments.
- Pay more than the minimum: Paying no more than the minimum payment means you will be paying your debt for a very long time, spending even more than necessary. While your goal must be realistic, don’t blindly follow the minimum suggestion. Pay as much as you can afford to.
- Make a debt repayment plan: Make a plan for consolidating and paying your debts so you can get closer to financial freedom.
- Minimize interest: Either pay off your highest interest debt first, or consolidate your debts so you can lower your overall interest rates. This will shave time off your repayment period and also reduce how much money you are spending overall.
How to Get Out of Debt During Covid-19
If the Covid crisis has worsened your financial situation and you are unable to pay your debts as easily as you did before, it’s time to re-strategize. Not paying your debt is not an option. This can damage your credit score and make acquiring new loans or a new job impossible. If you can avoid filing for bankruptcy, it is in your best interest. Bankruptcy should be seen as an ultimate last resort.
Here are a few things you can do to get out of debt despite the crisis:
- Downsize your home if possible
- Trade in your car for a more affordable one
- Minimize your spending
- Sell off any items you have that you no longer need (every cent counts)
- Meet with a debt consolidator to see how you can lower your debts
- Consider taking a job in a different field to ensure you have at least some income coming in
Should I Take Payment Deferrals?
Payment deferral is a temporary solution creditors are offering some individuals due to the Covid crisis. But there is a catch. Deferring payments does not defer your interest. In fact, interest continues to accumulate. This means that you are actually setting yourself back even further.
Many institutions are also forcing consumers to pay back whatever they have deferred at a later time. The capital and the interest are quietly growing as you defer your payments. It would be better to take out consolidated loan to cover your other bills rather than to defer them.
Why BHM Financial?
Why should you choose BHM Financial? If you are suffering from overwhelming debt, you need help. Our goal at BHM is to help you manage your debt effectively and efficiently. We want you to be able to pay your debt and still be able to manage your life. We want you to build a financial plan with us that will eliminate your debt and help you continue to live a debt-free life after your repayment plan is complete.
BHM Financial is a firm of financial experts who can help you solve your debt problems, even during this time of hardship for nearly everyone across the country and the world. We know how important it is to keep your credit report intact. Overwhelming and growing debt can damage your credit and cause serious harm to your financial future. By consolidating your loans, you are reducing your risk of damaging your credit any further.
Not sure how debt consolidation works or how it will help you? Contact us today to find out how one of our advisors can help you with your individual goals. Don’t pay exorbitant interest rates for a moment longer. Call BHM Financial for the help you need to take control of your financial future and get well on your way to financial freedom.