It’s our new normal: Tens of millions of Americans are unemployed or on a reduced income. We’re social distancing and spending more time at home. But one thing hasn’t changed – debts still have due dates.
If you’re among those who are out of work or earning less because of the pandemic, paying off those debts in full is less important now that your cash is limited.
Instead, your best move is paying minimums or taking advantage of hardship programs so you can build up savings. Yes, now might seem like an odd time to focus on savings, but gathering any cash you can will give you more flexibility to respond to the next emergency.
Dig into cutting expenses wherever you’re able. And if you were laid off and expanded unemployment benefits are more than your old pay, see if you can save some of that additional income.
Having cash is important
Already the impact of the pandemic has been vast and disorienting, and we don’t know what the economy or job market will look like in coming months.
But increasing the cash you have on hand can lend stability. Savings of as little as $250 to $749 can make families less likely to be evicted or miss a housing or utility payment after a drop in income or job loss, according to a 2016 report from the Urban Institute, a think tank based in Washington, D.C.
“Normally, you would want to pay off your credit cards,” says Dan Keady, chief financial planning specialist at TIAA, a financial services organization. “But on the other hand, you do have to maintain a cash reserve in the household, because it is a rather uncertain time.”
Update your money picture
Make sure you understand your current budget. Break down what you have coming in and your monthly expenses, including minimum debt payments.
Use the number you came up with for your monthly expenses as an initial savings goal and work to free up cash so you can save that amount.
Find ways to save money daily, weekly and monthly. You might be able to trim subscription services, save on groceries or shop for a lower insurance rate for your car or home.
Still struggling? Delay payments
If stripping down your budget and paying only minimums isn’t enough, consider contacting creditors and asking to pause payments. They’ll want you to explain why you can’t pay.
“Be ready to plead your case,” says Jordan Sowhangar, a certified financial planner in Souderton, Pennsylvania. “Gather details of your income, how you’ve been directly affected by coronavirus. They’ll want to know when you can repay before they put together a customized game plan for you.”
Which debts you can delay will likely depend on the type of debt and creditor. Here’s how to think about different debts:
Credit card debt: This may be one of the easier debts to delay for a month or two. Your creditors want to work with you, so give them a call to discuss options. Note that depending on your creditors’ policies, you may still accrue interest while your debts are deferred.
Mortgage: Entering into forbearance – where you can make a lower monthly payment or skip payments entirely for a time – may be your best option if you’ve been financially affected by the pandemic. Terms vary: Some lenders are expecting lump-sum payments at the end of the forbearance period and others may tack delayed payments onto the end of the loan.
Private student loans: Unlike federal loans, which have been put on hold through September, private student loans may be trickier to put off. But it’s still worth calling your loan servicer to discuss options if you’re struggling to afford payments.
No matter what debt you’re trying to delay, understand the terms of your agreement with your creditor. Pin down what concessions you’re getting, when you’re expected to resume payment, and how it will be reflected on your credit reports – and get it in writing.
Know when to use savings
Once you’ve saved a month or two of expenses, set some guidelines for yourself for when to use it. An emergency fund is designed to handle unexpected expenses, such as car trouble, rather than to aid debt paydown.
When you have a moment of doubt about whether to put this toward debt, take the long view: A few hundred dollars saved this month could see you through lean times ahead.
Sean Pyles is a writer at NerdWallet. Email: [email protected]. Twitter: @SeanLoranPyles.