Many parents wonder how to get out of debt after having kids. Today’s guest post by Jacob Evans offers some excellent insight into how to avoid the debt trap and what you can do going forward to minimize the impact.
Get Out of Debt After Having Kids With These 4 Strategies
The Burden of Debt When You Have Children – and How to Avoid It
Being a parent should be a joyous time, but financial woes can put a damper on expecting or raising a child. Millions of families experience anxiety and worry about debts they owe, from mortgage balances and credit cards to student and auto loans. While debt is often a means to an end, making large purchases or unexpected bills easier to manage from a monthly cash flow perspective, carrying consumer debt when a child is on the way or already in the picture can be overwhelming.
Without a realistic strategy to repay debts and the interest that builds up over time, it seems impossible to set aside for a child’s long-term financial needs. Paying for his or her future education, covering daycare costs, and managing the surprise expenses that go hand in hand with having a child are difficult when debt is part of your financial picture.
Whether you’re a current or prospective parent worried about your debt load, there are ways to manage your financial obligations while also providing financially for your child.
Frugality is Key
Planning ahead of time is one of the best steps you can take when a baby is on the way. Evaluating income versus expenses each month and creating a budget that works for your household is a necessary part of the process. Crunching these numbers provides a reality check for how much is being spent on debt and other living expenses each month, and how much is left over to expedite paying things off. If cash flow seems too tight to squeeze out any additional dollars to put toward consumer debt payments, consider reducing the following common monthly expenses to make frugality your goal:
- Dining out: this category of spending is often where most families well exceed their budget. Think about ways to reduce or altogether eliminate the dining out bill, like planning a menu for the week, preparing meals in bulk in advance, or taking lunch to work every day.
- Household extras: items like cable, cell phones, and gym memberships may seem necessary in life, but each adds up to a pretty penny every single month. If you can’t live without these amenities, contact your provider and discuss options for reducing the monthly charges either temporarily or permanently.
- Entertainment: if you find that you’re spending a significant amount on movies, music, or other entertainment each month, give yourself a hard budget for this category or swap the activities out for outings that are free. Reducing or eliminating this amount before the baby comes can provide a little extra to put toward debt.
Consider Restructuring Your Debt
After the budget work is done and reducing monthly expenses complete, it may be worth taking a closer look at what debt is owed and the interest rate associated with each. A major player in the inability of some households to fully get out from under the burden of debt is interest accumulation. When a balance remains unpaid on revolving debt, like credit cards, the minimum payment barely moves the needle on the principal balance, if at all. The same goes for student loan debt when an income-based repayment plan is selected. Restructuring these debts may prove to be beneficial in the long run if interest is piling up each month.
For credit card debt, consolidating high-interest-rate cards with a zero-percent balance transfer offer or a low-interest personal loan may be a smart move. Eliminating or greatly reducing the interest charges each month allows each dollar paid toward the debt to work that much harder, helping you get rid of the debt for good quickly.
For prospective or current parents with student loans, refinancing into a private student loan with a longer repayment period, a lower interest rate, or a combination of the two helps ease the burden on monthly cash flow. Before embracing consolidation or refinancing as a viable option, however, it is important to understand the terms of the new debt you will be taking on and the upfront and long-term costs associated with each.
Use Extra Income Wisely
For households with extra income each month, utilizing what’s known as the snowball method for debt repayment is a smart method to eliminate debt quickly. Through this strategy, debts are listed from smallest to largest along with the minimum payments due. The minimum payments are made on all debts except for the one with the smallest amount owed – this is where the extra income should be focused. Once the smallest debt is paid off, the next smallest debt is the focus, with extra money put there. Studies have shown that following the snowball method for debt repayment works well in expediting the process, due in part to the motivation that comes with paying off the first, smallest balance.
Not every method of debt payment works for every household, but soon-to-be and current moms and dad have an opportunity to speed up the process by following one or more of these methods. Start with an in-depth review of monthly expenses, and cut costs where it makes sense. Follow up by considering ways to restructure your debt with the intent of lowering the interest rate or extending the repayment term. Finally, if extra income is in play, use the snowball method to gain traction and keep it up until your debts are paid in full.