Managing Debt in a Down Economy

The fact that debt becomes more burdensome in bad economic times almost goes without saying. Fortunately, there are ways to keep things on track, as these tips for managing debt in a down economy will demonstrate. 

1. Stop Borrowing

One of the most important steps for people who are seeking to bring their debt under control is to avoid making it larger. After all, more debt results in a bigger and bigger burden on the borrower. This is particularly important because finances can be unpredictable in bad economic times.

2. Cut Costs

Having more disposable cash always makes debt a bit more manageable. However, if people find it hard to raise their incomes in good economic times, they are going to find it even more difficult in bad economic times. 

As such, the easier solution tends to be cutting costs. If you aren't sure what you can and cannot cut, check your bank transactions to see how you’re spending on a monthly basis. This makes it easier to pick out non-essential expenditures to determine which ones you can go without incurring.

3. Establish an Emergency Fund

No one can predict the future with perfect certainty. As a result, you need to be prepared for the potential of an unexpected cost coming up, which can be particularly hard-hitting in bad economic times. This is why financial guru Dave Ramsey is so big on emergency funds. 

Under ideal circumstances, you’ll be able to survive for 12 months on your emergency fund. However, every bit of savings helps, meaning it’s worthwhile to establish your fund sooner rather than later — if you have yet to do so. Along these same lines, it makes sense to automate your savings so the money gets diverted into savings before you even see it. 

4. Pay Down Debt

While this can be a difficult proposition, paying down your debt will make it more manageable in bad economic times. After all, paying down debt means reducing the amount of interest charged upon it in each period, meaning that more of the payment will go towards the principal than the interest. 

Over time, this will make for faster and faster repayment. Generally speaking, interested individuals should pay down the debt with the highest interest rate before their other debts because that will make for the fastest progress. In some cases, they might struggle with motivation. If so, they should consider paying down the debt with the smallest outstanding balance so that each success can fuel their determination to continue. 

5. Ask Creditors For Assistance

Creditors have a hard time recovering their losses when debtors default. This is why they are sometimes willing to take a short-term loss to prevent their debtors from going under. 

Contact the people you owe to see if they’re open to working with you. Perhaps you can get an extension of the grace period, a lower interest rate, or some other kind of assistance. As Brad Stroh, co-CEO of Freedom Debt Relief says, “One thing is certain, you’ll generally get nothing if you don’t ask”.

6. Seek Professional Help

One needn’t have reached dire financial straits to seek the advice of a good credit counselor. Usually working on a non-profit basis, these people can provide a “wealth” of great information to help you make your money do more. According to noted finance advice columnist Suze Orman, they can provide budgeting advice, help you find cash in your current budget you might have overlooked and if it comes down to it, help establish a debt management program. 

Managing debt in a down economy is absolutely doable. You just have to be careful to make sure every dollar does as much work for you as possible. These tips will help you do just that.