If you’re like most of the people I talk to, you get paid on Friday, pay your bills, and you’re broke by Monday. If this sounds like you, please read on.
No one wants to live paycheck-to-paycheck but it’s a reality for many hard-working Americans. And when money is tight, you will naturally look for ways to reduce your expenses now, not later. However, today’s decisions can have long-term negative affects. There are two popular methods of expense-reduction I see that actually do more harm than good, but most people don’t know it. In this article, I’d like to help my readers understand these common mistakes a little better.
Student Loan Forbearance
Most student loan forbearance programs will allow you to temporarily discontinue payments for a period of time without defaulting on your loans. However, the loans continue to accrue interest during the forbearance period. Currently, student loan interest rates are anywhere between 5.2% and 7.6% depending on the type of loan you have.
According to NerdWallet, the average student loan balance (per person) is $43,538. That mean that even with an interest rate as low as 5.2%, for each year of forbearance, you accrue interest of $6.20 per day or $2,264 per year, bringing your balance up to $45,802. Don’t believe it? Check out this forbearance calculator https://www.nerdwallet.com/blog/average-credit-card-debt-household/#forbearance-calc
So, what’s the solution? Well, since there is no such thing as a magical money tree (sorry), I can’t offer you any miracles. However, here’s a few realistic ideas that may help you manage a little better.
Eliminate your daily caffeine fix: No, I don’t mean entirely. But for the price of a mocha skinny frappucino, you could cover the daily cost of your interest. That won’t directly help paying off your student loans, but it will keep your balances from growing, as in the last example, which will make future payments more manageable.
Ask your lender about programs other than forbearance: Lenders don’t generally offer solutions that are not in their own interest. However, many lender have programs that allow you to postpone payments without interest, and in some (extreme) cases, total or partial loan forgiveness may also be available. And, almost all lenders offer income-based repayments plans with built-in loan forgiveness after 20-25 years. But if you don’t ask, you won’t know.
Stop paying other debts. If you’re spending more than 25% of your income on credit card debt, you may want to consider bankruptcy. If you eliminate a few hundred dollars in credit card payments, you can use those additional funds to pay off student loans (which are not dischargeable under current law).
Reduce or eliminate unnecessary expenses. This might as well be my mantra. But I cannot say it enough. The majority of my clients may have been able to avoid bankruptcy if they had just tightened their belt a touch. Closely examine your bank statements and scrutinize your spending habits. Look for unnecessary spending, like eating out, large cell phone and cable plans. Also, check to see if there’s a free version of your favorite streaming or music service. You don’t necessarily have to eliminate everything, but even a few dollars a day will add up at the end of the year.
Making Minimum Payments on Credit Card Debt
I’ve written more than a few articles on the evils of credit card interest and minimum payments. If you can only afford the minimum payment, chances are, you’re payment is being flushed down the toiled each month.
I won’t bore you with the mathematics yet again, but minimum payments usually only cover the accrued interest (and maybe a little more). That means with each payment, you are only making the credit card company richer; but you’re not doing anything to reduce your balance any closer to zero.
In the worst cases, I’ve actually had clients tell me that they make the minimum payment each month to keep creditors off their back, only to then be short on cash for essential items like food, utilities and insurance, which forces them to charge these to the credit cards they just paid! It’s a vicious cycle!
According to NerdWallet, households with revolving credit card debt will pay an average of $1,141 in interest per year, and these numbers are on the rise!
Again, I can’t offer any magical solutions, but I can offer professional and competent bankruptcy services. Most bankruptcy filers qualify for 100% debt elimination and it takes only a few months. Why struggle to keep the lights on when you can start savings thousand a year on interest (or use the new-found cash to pay down student debt).