With economic indicators showing the impacts of the COVID-19 pandemic, it may be a good time to shore up savings and reduce debt to ensure good financial footing. When considering how to tackle an unexpected expense, take into account amount, timeline, urgency and other factors like interest rates.
Confront an unexpected expense with these questions:
- Is this an expense I need to tackle right now?
- Did I research to find the lowest cost and sensible option?
- Do I have enough in savings to cover the full amount?
- Is there a payment plan option I can explore?
- Does my available credit card balance cover the full amount?
- How quickly can I pay down the balance if I use my credit card to pay?
- How much interest will be charged while I work to pay the card balance?
These questions are important steps to determining whether a credit card or your savings is the right way to pay for a surprise cost.
Wiped out your savings? Get it back.
- Tuck away money each month
Set aside a specific amount of money each month as though it was a required expense. Increase the amount as you can afford to over time.
- Analyze and reduce expenses
Put your monthly expenses into two buckets: fixed and flexible. Fixed expenses are items like your rent or mortgage because the amount tends to stay the same each month. Flexible expenses are costs such as groceries and electricity that vary month to month. Take a close look at your flexible expenses to see if anything can be reduced to stalled while your build your savings back up.
- Be consistent
Consistency is key for building a secure savings amount, which is recommended to be equal to at least six months of your living expenses. Every dollar into your account is progress.
Building an emergency fund is just as important as getting debt under control and being financially healthy.
Had to use your card? Tackle the debt fast.
- Focus on high interest debt first
It may be easier for you to stick with a debt payoff goal if you attack the card with the lowest balance. However, most financial experts agree that the best practice is to pay down the balance on the highest interest card first.
- Double or triple payments
Consider doubling or tripling your monthly payments, or apply tax refunds, bonuses and other windfalls toward outstanding balances. The faster you can tackle your highest interest card, the sooner you will reach a debt-free lifestyle.
- Stick with your plan
When faced with debt, it is critical to track and budget expenses to monitor progress and keep spending habits under control. Once the highest-interest card reaches a balance of zero, it’s time to move on to the next highest interest card.
Getting credit card debt under control requires excellent planning, dedication and patience. Once goals are met, it is important to keep moving forward with healthy spending and savings habits. Being financially prepared for life’s unexpected events is smart. Having peace of mind is priceless.
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