Inflation means higher prices; higher interest rates; and often, higher levels of stress when it comes to managing money. If you’re one of the many people who are paying off a mortgage, credit card or loan of any kind, then read on for some tips about how to manage debt during inflation.
Adjust Your Spending
One of the best ways to manage debt during inflation is simple: spend less. Easy to say, tough to put into action! But despite the difficulties, it’s essential to adjust your spending during inflationary periods as the cost of goods is higher than normal. Use the local food bank to reduce your grocery budget, head to the library for books and games, delete the food delivery apps from your phone and commit to cooking at home. Any cuts you can make in spending will mean more money at the end of the month to tackle debt.
Limit Credit Card Use
Inflationary periods are a dangerous time to add more credit card debt. Most cards have a variable APR, which means interest rates will be higher when inflation is pervasive. To avoid going further into debt, limit credit card spending wherever possible and aim to pay off your full balance every month. Borrowers can also consider a balance transfer to a new card, many of which offer 0% interest for an introductory period. A financial counselor can walk you through the ins and outs of a balance transfer to see if it makes sense for you.
Talk to Your Lender
Many borrowers fall into the trap of thinking they are alone in paying down their debt. The right lender should be willing and eager to support you if making payments is a struggle! Lenders would much rather that you communicate your current challenges, instead of missing a loan or credit card payment with no warning. Get in touch with your lender, explain the situation, and ask what’s possible. You may be able to adjust when monthly payments are due, or potentially take advantage of loan consolidation or refinancing to get a lower interest rate.
Make a Strategy
Did you know that there is more than one way to pay off debt? The two most popular debt repayment strategies are the snowball method (paying off small debts first) and the avalanche method (paying off high-interest debt first). In general, when inflation is high it’s best to prioritize paying off variable-rate loans which will have a higher interest rate when inflation affects the wider economic environment. This doesn’t mean that you should miss payments on fixed-rate loans—but it is a good idea to re-strategize your payments to put more money toward high-interest, variable-rate loans where possible.
Ask for a Raise
With prices rising at the gas station and the grocery store, now is a good time to ask for a raise. Companies are aware that inflation is affecting employees, and they may be more willing than normal to consider pay hike requests. As always: it can’t hurt to ask! If you do get approved for a raise, don’t head straight for the shopping mall. Put the extra funds toward paying off debt, and save the shopping for a time when inflation has calmed.
Don’t Panic
Holding debt during a period of inflation isn’t necessarily a bad thing. Economic theory dictates that borrowers benefit when inflation rises, because the money they’re repaying to lenders today is worth less than when it was borrowed. This is particularly true for borrowers in the past few years, who’ve seen lower-than-average interest rates. With all that in mind, some experts even recommend that borrowers consider not paying beyond their minimum payments during inflation, and instead investing extra cash in a high-yield savings account, bond or CD, to take advantage of higher interest rates and grow their savings.
