Americans have racked up credit card debt — and inflation is making it harder get out of the debt cycle. According to recent data from the Federal Reserve Bank of New York, total household debt reached $15.8 trillion in the fourth quarter of 2021, an increase of $333 billion from the third quarter. Credit card balances alone grew by $52 billion, the largest quarterly increase in 22 years.
Paying down debt while dealing with rising costs is a challenge, but with the right strategy, it’s possible to get out of credit card debt, even in times of inflation.
Now is the time to focus on your discretionary spending
The cost of basic necessities like groceries, gas and utilities has skyrocketed. But unfortunately, these are expenses that you usually cannot avoid paying. What you can control are your discretionary spending. To see where you can cut back, it’s important to first see where you’re overspending.
“I highly recommend [using] an expense tracker,” said Rob Stevens, retirement income specialist at TIAA. “There are many good free apps available on your phone. They bring all your credit card, debit card and cash withdrawal spending together in one place so you can see your transactions. And they have them categorized too into categories, such as restaurants, entertainment, utilities, and car expenses, so you can really see where your money is going.They also usually pull the last six months automatically so you can see some trends.
Once you have a clear idea of where your money is going, you can strategize to cut spending in categories where you might be overspending. Whether you’re spending too much on dining out, entertainment, or something else, there are always ways to limit your spending.
“Can you bring your lunch to work instead of eating out every day? Do you need all the streaming services you added during COVID when you couldn’t go to the movies? Could you cut a few Are you paying for a gym membership that you no longer use? Could you invite friends over for dinner and take turns entertaining instead of always going out to eat each time? tough decisions to make, but there are choices in terms of saving money,” Stevens said.
Any money you can save on discretionary spending can be used to pay off your credit card debt. Think of credit card debt as an additional category in your monthly budget that you’ll set aside money for.
“People don’t like the word budget — I think of it as a ‘spending plan,’” Stevens said. “At the month, I manage my lifestyle [expenses] but also see [how I can get] on credit card debt or [stop from] promote credit card debt.
If you’re struggling to see where you can cut costs to redirect funds to pay off your credit card, you may want to seek professional advice.
“If you have a financial advisor, that’s the kind of stuff you want to share with them,” Stevens said.
He also recommends using a credit card payment scheduling app to help you stay on track. These apps allow you to enter the amount of your credit card debt, your interest rate, and the amount you plan to contribute each month so you can see how long it will take you to pay off your debt.
“I think that’s incredibly helpful because if you know, I’m making that sacrifice by not going to Starbucks anymore, but if you have a light at the end of the tunnel, you’re more likely to stick with it than if you feel like you’re throwing a bucket of water into the ocean,” Stevens said. “These can give you a finished plan to pay off your debt, which is very helpful for your behavior.
Is it okay to go into credit card debt during times of inflation?
Since almost everything costs more, it’s easier than ever to rack up new credit card debt. But that should be avoided if possible, Stevens said.
“You really don’t want to fund shoes and things like that,” he said. “It really hurts your financial well-being — your ability to have an emergency fund, college savings, retirement savings, savings for a home — all those things you want to do for progress further and put you in a better financial position. It tends to prevent that.
There are extenuating circumstances that may cause you to rely on a credit card, such as job loss or unexpected medical bills, but this debt should be viewed as a temporary solution.
“Rather than seeing credit card debt as OK, see it as something you want to get away from,” Stevens said. “It may be a necessary temporary evil, but I don’t think you want to get comfortable with it and say, ‘That’s how it is. You want to plan to mitigate it as quickly as possible.
How to Balance Paying Down Debt and Saving for the Future in Times of High Inflation
Saving for the future can seem impossible when you’re juggling rising costs and credit card debt, but Stevens said it should always be a priority.
“Pay yourself first,” he said. “You want to have an automatic distribution directly to your 401(k), IRA, Roth IRA, and then build the rest of your lifestyle around that.”
Stevens said that at a minimum, you should contribute enough to maximize an employer match, if offered.
“Let’s say you’re 25 years old with a salary of $50,000 and your 401(k) is 100% matched to your first 3% contribution. If you put in $1,500 and they put in $1,500, it will exceed the 16% credit card [interest],” he said. “They give you a 100% return, so you want to take advantage of that.”
He again stresses the importance of cutting discretionary spending before cutting your savings for the future.
“If you go to Starbucks every day, cut it down to two days a week and treat it like a treat,” Stevens said. “Identify things like this first before cutting your savings.”
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This article originally appeared on GOBankingRates.com: How to Manage Credit Card Debt as Costs Rise Due to Inflation