How to pay off massive, unsecured family debt in 2019
The purpose of DaddyProofed is to explore a range of issues that affect families (especially those with multiple or special needs children) and to present and review innovative solutions.
There’s arguably no issue more concerning to any head(s)-of-home than debt. Especially, the “bad” kind, by which I mean credit card debt and high-interest loans and lines of credit.
Like fitness goals, the topic of financial freedom is par for the course around New Year’s Day. And like fitness goals, the solutions are generally common sense ones. There is no magic pill, so to all the parents whose debt-payoff and college fund- and retirement savings strategy is basically playing the lottery — JUST STOP IT! This article is for the parents who are determined — NO EXCUSES THIS TIME — to aggressively pay down, or pay off, their debt in the new year.
That said, the last thing you need to do right now is to judge yourself based on your past actions or the opinions of others based on those past actions. Now is the time to take action based solely on the strength of your ambition to be financially free. Any positive step you take right now is a step in the right direction — and an obvious money-saving step relative to the one you take tomorrow, or next year.
Take control of your time and budget and execute on some — or all — of these tried and true strategies for eliminating “bad” debt. As you would with your health, consult a professional, especially if you are attempting risky debt-payoff strategies. Just be patient, be proactive, and be focused on your goal.
- Stop adding to the debt. Some financial experts recommend cutting up your credit cards — or, as suggested at The Simple Dollar, freeze them in a block of ice. But don’t close them, which could hurt your credit score. Nonetheless, getting rid of the physical credit card doesn’t really work in the age of online and mobile shopping. The best way to do stop using them is to live within your means. That means saying “no” to wants and being creative on how you meet your needs.
- Create a budget and stick to it. You can’t effectively manage your finances if you don’t know where your money is coming from and going to. There are many tools and strategies for budgeting. I like the one at the LearnVest blog, which recommends that you categorize your spending into four buckets: Fixed Costs (i.e. the electricity bill), Financial Goals (college savings or paying off debt), Nonmonthly Expenses (i.e. taxes, insurance, annual membership fees), and Flexible Spending. The last one may be the trickiest, and most important, one for families because it includes the cost of food, shopping, gas, and entertainment. This is where you could probably save the most.*
- Create an emergency “rainy day” fund. Once you have an honest discussion of wants and needs and after you have created a clear budget, this is sneakily the next best way to avoid adding to your debt. Basically, set aside at least $1000 from your income (NOT borrowed money). When an emergency occurs (like an important car repair or a trip to attend a family funeral), use money from that fund instead of using a credit card for the large, unplanned expense.
- Determine and set up your debt pay-down method. To keep it simple, you can either pay off your credit cards and loans from highest to lowest interest rate (the debt avalanche method) or from lowest to highest balance (the debt snowball method). The avalanche method could pay down the debt faster; the snowball method is generally more motivating and could improve your credit score faster. Try out this Debt Payoff Calculator at LendingTree’s Magnify Money blog.
- Renegotiate the terms of your loans or consolidate your debt using lower-interest debt. If you have good to great credit, then contact your creditors and see if they will lower your credit score (and do it before the Federal Reserve raises the rates again!) Or transfer your debt to a zero- or low-interest product. Doing so will reduce the amount of interest being added to your balance, which will help you pay off your debt faster.
- Improve your credit score. If you don’t have good credit, then don’t despair. You still have many other ways to reduce and eliminate your debt — and thereby improve your credit score. Contact a skilled practitioner — like Financial Common Cents — who can help you clean up your credit report and set you on the path of being credit-worthy again.
- Go through your budget and cut out or reduce expenses. For example, if your car note is $500/month (and you don’t have a lot of negative equity), perhaps you can trade that car will only cost you $350/month over a similar or shorter loan schedule. Also, maybe you don’t need both Netflix and Hulu — or either. And is your grocery bill a bit bloated? Steal some grocery-shopping tips from America’s MoneySmart Family (fka America’s Cheapest Family).
- Do stuff yourself — then pour the savings onto the debt. This strategy sucks because time equals money. And for some parents, doing some household or auto repair could take hours as opposed to a professional doing it in minutes. Do the calculation and make that determination for yourself. In general, mowing the lawn, shoveling snow, unclogging the drain, cleaning the house, and even changing the oil are relatively low-skill tasks that could save you hundreds over the course of the year.
- Do stuff for others — then pour the extra income on the debt. One word: Hustle! Either try to get a pay raise in your current job or do work on the side — or both. Don’t be paralyzed about what you do on the side. Just start somewhere: Sell stuff on eBay, drive Lyft, write blog posts, mow lawns, shovel snow, recycle bottles, participate in paid research studies, apply every day for a steady part-time job, etc. I know parenting is hard by itself, but being debt free is so worth the sacrifice!
- Borrow from your home equity or from your retirement savings. This may be the most controversial strategy in this list. However, it is worth at least mentioning. If you and your financial advisor agree that your debt situation is untenable and that the negative savings from your high-interest debt load far outweighs your investments, then one could argue that it makes sense to borrow from your home or 401(K) at a low-interest rate (~5%) to pay off a 25% credit card. (It ALMOST NEVER makes sense to withdraw from your retirements savings early to pay off high-interest debt — but even there, you would have to do the math to see if it makes sense for you.) Borrowing from your house or retirement pot will put you in a bind, so don’t do it willy-nilly!
- Make it a family game to budget and save money. Have your children go around the house turning off lights and plugging out electronics. Take the family thrifting for clothes twice a year. Order pizza just once a month (and cook in every other day) and really make it a party out of the event. And while you’re at it, throw a Budget Party when you do your periodic budget meetings, like Andy and Nicole at the Marriage Kids and Money blog. The part of the budget meeting that really makes it a party is the “future dreams” discussion: What will we do when we are financially free of unsecured debt? Start a business? Pursue careers we’re passionate about, even if it pays a little less? Pay down our mortgage faster? Save more for college or retirement?
- Map your ambition to your actions. Every little thing that you do to spend less, earn more, and bring down your family debt is a great one. Just don’t be fancy about it. It doesn’t matter what your neighbors think that you turned off your Christmas lights the day after Christmas instead of running it until January 2nd. And who cares what the Joneses think about you trading in your BMW SUV for a used Kia SUV? Never try to keep up with the Joneses!