Paying off Debt and Building Your Savings In Times of Economic Hardships

With a recession on the horizon, many people are about to lose their homes, vehicles and other valuables used as collateral because they won’t be able to meet their loan obligations.

Don’t be one of them!

What is debt?

Debt is the money we use to pay, when we don’t actually have the money to buy.

Today, we have become so used to buying things that we can’t afford. We pay for houses, vehicles, education, vacations and even clothing with loans, credit cards, lay away and higher purchase plans.

Debt, is it worth it?

Yet, we never realize how expensive debt actually is. We never take the time to sit down and check how much interest we are paying.

We never try to define how much the sleepless nights of trying to figure out how to make payments cost us. Because, at the end of the day, we don’t determine value in terms of sleep and time.

Yet, this seems to be the way that the rich determine value. So what are we missing?

How Severe is Your Debt?

Believe it or not, we have people whose debt was manageable a few years ago before inflation. Salaries were good, the word economy was good and the future looked great.

Banks were trying to acquire more customers to take advantage of the economic boom. That is, until covid hit.

Then we started to panic.

Lost in Time

The loans that seemed so easy to pay, during the good times, have started to become harder to manage. With reduction in salaries, and the lockdowns that stagnated every economy in the word, it is no surprise that Belizeans would also be hit hard.

Today, the United States has seen the most significant inflation rates for the last 100 years. Pointing to a severe recession coming our way.

Belize, with our dollar pegged to the US dollar, is thus also seeing a very harsh decline in purchasing power.

Gone are the days when we could buy 4 eggs for a dollar. Today, it seems somewhere around two.

Inflation, coupled with the fact that every country is also starting to see a rapid increase in interest rates, means that if you didn't secure fixed interest rates for your loans before, it could result in an increase in rates, and ultimately in most of your payments being directed towards interest payments.

Resulting in your principal going down a lot slower than you had initially anticipated. The loan that should have been paid off in 15 years, will have an additional 5 years of payments added to it.

This also means that you are probably finding yourself in a tough debt situation today.

Trying to find a silver lining

As bad as it may be, there is hope. Yet, it comes with a time of trial and hardships attached to it to help you service your loans, build your savings and learn from the mistakes of the past.

So how do you get through this time?

First you need to take a hard look at your earnings. How much money do you actually earn, after taxes, social security, insurance and pension?

Then you need to evaluate the debt payments that you have. Check out the terms of the loan, and find out if you obtained it under a fixed or floating interest rate.

If it was floating, note that interest rates are rising this year, so contact your banks and inform yourself of exactly what it is that you are paying.

Then, evaluate the percentage of your salary that is going to go towards servicing the loan.

If more than 1/6th of your salary goes toward servicing the loan, you are in big trouble.

So, contact your loan provider and try to negotiate better conditions, with the payment that you could actually afford, trying to keep it within 1/6th of your earnings.

*Note: During this time, banks may be a bit harder to deal with as they are also taking a hit, yet know that many people will be defaulting on their loans, so if you are proactive, you could maybe avoid being one of those people. Communicate with your loan officer and find out how you could work with them, to better service your loan and avoid defaulting.

Then, set another 1/10th of your salary aside, as yours. This is yours to keep so that you can start building your savings.

Make a budget and stick to it, living off the remaining 70% and nothing more. You may have to give up a lot of the luxuries that you are used to. It will not be easy, yet it will be the easiest way for you to survive the coming years.

At the end of it, you would have kept your assets, reduced your loans and built your savings.

If you need to access the budgeting template we provided some time ago, click HERE to be redirected to that blog post.

The challenge

Do the first part of this formula, finding out how much money you are taking home and how much of your salary goes towards repaying your debt. Then, implement the second part and stick to it for a year to see if it can help you to get back on track.