Inflation Is Forcing 26% of Americans to Stop Paying Off Debts. Here's How to Stay on Track
- Many people are making financial changes in the wake of inflation.
- It's important to stick to your debt payoff plan, especially with a potential recession looming.
- Consider cutting back on your leisure spending or picking up a side gig to keep up with debt payoff.
That's not a great path to land on.
Given the way inflation has been wreaking havoc on consumers since mid-2021, it's easy to see why some people may have racked up debt over the past year. Or, it could be that you had debt before inflation took hold, and that you're still carrying a loan or credit card balance.
The sooner you pay off your debt, the less money you're apt to spend on interest. Plus, paying off credit card debt in particular could work wonders for your credit score.
But in a recent Morgan Stanley report, 26% of Americans say they're scaling back on paying down debt due to inflation. And that's a move you might regret.
The problem with carrying debt right now
For months, financial experts have been warning that an economic recession could be just around the corner. And in light of that, it pays to shed your debt sooner rather than later.
If a recession hits, the risk of losing a job tends to increase. And the last thing you want is a series of costly debt payments hanging over your head at a time when your paycheck has taken a hit or gone away completely.
Furthermore, even if a recession doesn't hit, the Federal Reserve has been aggressively raising interest rates in an effort to slow the pace of inflation. If you owe money on something like a credit card or home equity line of credit (HELOC), you should know that your debt's interest rate is probably variable, which means it can change over time with market conditions. And at a time like this, carrying a credit card or HELOC balance forward means taking a risk of having to pay more.
How to stay on track with your debt payoff efforts
It's easy to see why you may have cut back on debt payments at a time when living costs are so unbearably high. But if that's the case, now's a good time to refocus.
First, set up a budget that accounts for your essential living expenses and see how much money you're left with once things like your rent, utility bills, and groceries are paid for. From there, consider slashing non-essential expenses until you've made good progress with your debt.
That doesn't mean you can't or shouldn't spend a dime on leisure. But it would be a good idea to cancel your $100 monthly cable service and replace it with a streaming service that costs $14.99.
At the same time, you may want to consider getting a second job while the economy is still strong. A side gig may not be an easy thing to get in six months or a year from now, but if you're able to hold one down in the near term, you can use your earnings to chip away at your debt until you've whittled down your balance or, better yet, eliminated it in full.
All told, right now is a pretty dangerous time to be hanging onto debt. If you've cut back on paying yours off due to inflation, do what you can to ramp back up. You'll be thankful for it if the economy does take a turn for the worse, or if the interest rate on your debt starts to soar in the coming months.
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