Last month, I talked about [ENGBLOG]some potential moves taxpayers could make by the end of the year. I wanted to remind you of those possibilities before I get to what else I want to talk with you about… (paying off debt)
- Look ahead to 2021 — project what your income might be, then make withholding and tax moves accordingly. Note: anyone who tells you definitively what a Biden administration would bring for your taxes is blowing smoke. We’ll have more to say about these things as they happen. More about this in future weeks as things become more clear.
- Adjust your withholding — you still have 1-2 paychecks to catch up on any overpayments or underpayments for this year.
- Spend down your FSA (if you have one) — don’t let these funds go to waste
- Give to charity — even if you take the standard deduction, you can ALSO deduct up to $300 in cash giving. DO IT.
- If you can, give tax-free gifts to family — if you have means, this is the simplest way to avoid estate taxes. You can give up to $15K tax free.
- Max out Connecticut workplace retirement accounts — I know, this is “la la land” for some, but if you still get this sort of perk, you only have a few more weeks to maximize it.
- Gather your virtual currency docs if you have them. IRS is scrutinizing these starting NOW.
Again, if you need a conversation, now’s the time.
One more quick note: mortgage rates are obscenely low right now. If you have a mortgage, it might be worth running some numbers related to refinancing. 15-year rates were under 2% last I checked … which is the lowest I’ve ever seen.
None of what I have just written will help you if you’re unemployed and drowning in debt. 2020 has been so terrible for so many taxpayers2. I have hope that there might be light at the end of this dark tunnel, but when you’re “in the tunnel”, not much feels like it can help.
Sometimes, though, making a plan for paying off debt is the best way to begin to see light at the end of a dark financial tunnel.
Thought I’d bring some light today, for you, if you’re beginning to swim in some deep financial waters…
Paying Off Debt by Emelia Mensa, CPA
”Tough times never last but tough people do.” -Robert H. Schuller
The average credit card balance for an American household as of this month was $5,897, which is (remarkably) DOWN from years past. Also interesting: personal bankruptcies are NOT yet rising, compared to years past.
But unemployment is still VERY high, and Congress has been slow to create more relief. There is a very good chance that 2021 could be very ugly for a significant portion of my readership, and our nation.
You may be in a better situation … it may also be worse. So, to answer the questions we often get around here from clients facing tough times, I’ve put together a step-by-step process which we often help people work through.
1. Do NOT just pay minimum payments
If you only pay the minimum payment each month, credit card and other loan companies typically engineer the “default” repayment plans such that your bill could continue to INCREASE, even if you completely stop using your card or source of credit. This is called “negative amortization”–where you think you are paying off debt but the additional fees and finance charges are more than the minimum payment. The bottom line is: Pay more than your minimum or you will eventually be in debt over your head.
2. Set it and forget it
With online banking and automatic payment options, there are GREAT tools for ensuring you don’t mess up because of administrative chaos. If you feel you can’t manage all your bills by pen and paper, there are several good software programs available for keeping track of your financial records.
In fact, I recommend that you automate a payment ABOVE the minimum monthly payment, just to be certain that you start getting ahead of the game. Do it now, while you’re feeling that zeal. Again, those minimum payments are rigged against you, and the only way to get ahead is to … get ahead. I have some more thoughts on automation in a moment.
3. Get on the phone and ASK — and then send a letter
No, you do not need to be an attorney or other Connecticut financial professional to negotiate with your credit card company (negotiating with the IRS, on the other hand, is a very different story!). The amount of consumer debt in this country has made creditors realize that they need to be more understanding of their customers — if they hope to get any money back. If you file bankruptcy they are only going to get pennies on the dollar, so they are often willing to make deals.
Open communication always helps. Usually credit card companies get ignored and end up sending delinquent files to a collections agency. So they’ll actually appreciate your openness in contacting them, and may be more understanding of your situation. Proactively dealing with your debt problem, rather than hiding, will not only help your financial problem, but will make you feel better about yourself as well.
4. Pay down proportionately
If you are not able to pay the full amount of your credit each month, you should still pay something to stay on top of it. You should work off of a written budget so you know exactly where you stand. Some experts suggest that you divide your monthly debt budget by the percentage each bill makes of the total and pay that amount.
Here’s an example: If you owe a total of $1,000, and one credit card is $800 and the other is $200, and you only have $100 available to pay for that month… You should pay $80 on the $800 balance, and $20 on the $200 balance. This way you are reducing each debt by the same percentage.
If you have multiple debts (excluding your mortgage), a simpler option is to make a list of all of the balances. Put them in order from smallest to greatest, and make payments on only the smallest first, until it is paid off. Then move on to the next, and so on.
Whichever method you choose, the important thing is to have a plan and commit to following it.
5. Remember: there are people on the other side.
Don’t be intimidated. No matter how forthcoming and honest you are, some creditors have been taught to be mean and downright nasty. Hang in there, and don’t let this tactic intimidate you.
Give YOURSELF the gift of light at the end of your tunnel, and remember … we’re here to help:
To your family’s lasting financial and emotional peace ~Contact.FirstName~…
Emelia Mensa EA, CPA
“CRISIS Action Plan” for my Connecticut tax clients and friends — which is still relevant today:
1) Don’t marinate in other people’s panic. Be mindful of your social media consumption.
2) Continue to stay financially and logistically prepared for worsening situations.
3) Make sure you have some ready, liquid assets, if you are able. (I.e., cash in the bank, and in hand.)
4) Set aside plans for any big spending until the dust settles — but especially look out for your small business owner friends and vendors.