Due to the steep increase in interest rates and extremely high inflation that consumers have felt at the grocery store and the gas tank, many with credit card debt, mortgages, and some student loans have been feeling the squeeze as borrowing has become more expensive and everyday items cost more. And this is all on top of the debt and overdue bills that many have accumulated throughout the pandemic.
With inflation here for the foreseeable future, consumers may feel that they are not able to take advantage of opportunities to invest and possibly increase savings down the road. During the pandemic, people suffered with extreme financial shortfalls that drove home the point that saving and taking control of their financial situation is important. It is also a goal for many to develop a financial plan that leads to self-reliance.
The good news is that the job market has made a full recovery since the early days of the pandemic and the “Great Resignation” has provided a huge opportunity to job-seekers looking to make a career change and a significant bump in pay. We reached out to a couple of established financial experts and asked them the same thing: How can one get back on track towards the path of financial freedom in this moment? Here is what they had to say.
“Make getting rid of debt a priority,” says Jean Chatzky, CEO and Co-Founder of HerMoney Media. An established financial journalist, financial editor for The Today Show and host of the podcast HerMoney with Jean Chatzky, Jean has been making money make sense for over 25 years. “The stress that is caused by debt is at the top of the list of what makes us unhappy about money. So take a look at the money coming in and the money going out.”
In other words, the best place to start is by taking a thorough look at one’s budget and really finding out where and how you spend money. While we may want immediate gratification, breaking the journey down into small steps will help us not only create and follow a roadmap to success, but this will make it much more manageable.
“Get back to basics, track spending, see what can be trimmed, and start paying off debt with the highest interest rate first and work your way down from there.” According to Experian, the average consumer is carrying some credit card debt and maybe even student loan debt. These tend to be the biggest debt hurdles that people find themselves struggling with.
Bernadette Joy Cruz, founder of Crush Your Money Goals, advises putting together a plan to pay off that first debt account (it could be a credit card, student loan, car note, etc.) even if it is the lowest balance. Bernadette learned first hand about ditching debt after she and her husband paid off $330,000 in debt in three years and built $1 million of net worth in their thirties. She founded her six-figure financial education company, Crush Your Money Goals, based on this experience and the strategies she used herself.
“Often, especially in the case of lingering debt, a person might be discouraged or unmotivated or think that the amount of debt is insurmountable,” Cruz told Insider, highlighting how much psychology plays in an individual’s journey in tackling debt and achieving financial goals. “Once the first debt amount is paid off, there is excitement about the potential of being debt free. That is when a timeframe should be set to have all of the debt paid off.”
With the increase in interest rates, credit card payments, mortgage interest rates and even some student loan payments are increasing. An average consumer may find that it is very difficult to save and invest when there is more money going into debt payments. It can also make it seem like the finish line to being free of debt is getting further away, or even out of reach. When a person is trying to build a nest egg, start a business or save for a home, any type of debt increase can seem like a setback, but Cruz says you should use this as a motivator.
“If you already have a payoff plan, don’t panic. Let the higher interest rate be an even greater incentive to stick to the plan and really pay off the debt. This should be a boost to get the debt paid down faster,” Cruz explained.
If you are now making a higher payment than usual, don’t feel helpless and definitely don’t think that you cannot find a way to deal with it.
“It’s important not to feel like you don’t have any power in this situation, look at your credit score, if it could be better, now is the time to make sure you are paying your bills on time, every time. If you have a good credit score, you still have leverage.”
According to Chatzky, “there are still good balance transfer cards out there. You might be able to improve your rate through a balance transfer.”
Experiencing the added pressures of this fluctuating economy, investing has become a hot button issue and a serious goal for many now. But is it possible to invest and pay down debt at the same time? Is now the time to try to do both?
“There really is an opportunity to get the biggest bang for your buck here,” explains Chatzky. “While working to pay off debt, I would also invest in a work-based retirement plan especially if there is a match. For example, if your employer offers a 50% match, that is a high return on your investment and you didn’t have to do anything.”
Sometimes just paying off the debt is its own reward. “If you pay off a credit card with a 25% interest rate, that is a 25% return and the more debt you pay off the higher the return will be,” Cruz told Insider.
It’s not only important to start investing, but it is also important to know where to start investing. Trying to sort through all of the options can quickly become overwhelming. But instead of feeling anxious about where to start, Cruz advises, “keep the drama out of your finances!”
“Retirement accounts are a great way to start and you can invest in the same funds or stocks in a retirement account as in a brokerage account, but without the tax hit.” Chatzky agrees, “a work-based retirement plan with a match is a great place to get started.”
Don’t think that you have to choose between paying off debt and investing for the future. You can do both and make significant progress towards your financial goals.
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