With inflation on the rise, many Americans are looking for ways to get their finances in order. One of the best things you can do is pay off high-interest debt, as inflation erodes the value of your money over time. In this article, we’ll examine different types of debt and strategies for paying them off during inflationary times.
Pay Off Credit Card Debt
Credit card debt typically carries a high interest rate, often 15% or more. This makes credit card debt very expensive, especially as inflation diminishes the value of your money. Paying off credit card debt should be a top priority.
Start by listing out all your credit cards and their interest rates. Tackle the card with the highest rate first while making minimum payments on the others. Once the first card is paid off, roll that payment amount into the next highest interest card. This “debt snowball” method allows you to pay off cards quickly.
If possible, consolidate multiple credit cards into a lower interest personal loan. This can make the debt more manageable. Balance transfer cards can also help reduce interest costs for a time. The key is stopping the compounding high interest rates as fast as possible.
Strategies for Paying Off Credit Cards
- List out all credit cards and interest rates
- Pay minimums on all cards except the highest rate
- Put as much money as possible towards that highest rate card
- Once paid off, roll that payment to the next highest rate card
- Consolidate cards into a lower interest personal loan
- Transfer balances to a 0% intro APR card
By diligently following these steps, you can become credit card debt free even with high inflation. This will save you significant money in interest and lost value due to inflation.
Pay Off Personal Loans
Personal loans typically have lower interest rates than credit cards, but rates can still vary widely. It’s important to focus on paying off high rate loans first.
Make a list of all your personal loans and their interest rates. Pay the minimum on all except the loan with the highest rate. Attack that highest rate loan with intensity until it is paid off. Then repeat the process on the next highest rate loan.
See if you can consolidate or refinance any personal loans to lock in a lower fixed rate. This can reduce the impact of inflation. Pay close attention to any variable rate personal loans, as inflation may drive up the interest rate over time.
Strategies for Personal Loans
- List out all personal loans and interest rates
- Pay minimums on all except the highest rate
- Focus intensely on paying off that highest rate loan
- Consolidate or refinance loans to get lower fixed rates
- Pay extra attention to variable rate loans
By methodically paying off personal loans starting with the highest interest rates, you can greatly reduce costs, especially as inflation eats away at cash balances. Consolidating or refinancing loans at lower fixed rates can hedge against inflation risk.
Pay Off Student Loans
Americans hold over $1.7 trillion in student loan debt, with an average balance around $30,000. This debt can hang around for decades, accumulating interest. Inflation makes student loans even costlier over time.
For federal student loans, enroll in an income-driven repayment plan to cap payments at a percentage of your income. This protects against inflation eating up more of your paycheck. Pay extra toward highest rate loans whenever possible.
For private student loans, contact the lender to see if they offer discounted payoff options. This allows you to pay a lump sum to settle the debt at a reduced amount. If you have variable rate private loans, look to refinance to a lower fixed rate.
Strategies for Student Loans
- Enroll in income-driven repayment for federal loans
- Pay extra toward highest rate federal loans
- Ask about discounted payoffs on private loans
- Refinance variable private loans to fixed rates
Student loans can be very challenging to pay off, but getting them reduced or on stable footing helps limit inflation damage. Every extra dollar paid now avoids larger costs later as inflation compounds.
Pay Off Auto Loans
Auto loans allow Americans to purchase cars they otherwise could not afford upfront. But this debt can stick around for up to 6 years on average. Inflation makes cars purchased with financing much more expensive over time.
Make extra payments toward the principal whenever possible to pay off the loan early. If your loan has a prepayment penalty, try to refinance to a lower rate without a penalty. For older cars, consider selling and paying off the loan in full.
Strategies for Auto Loans
- Make principal-only extra payments
- Refinance without prepayment penalties
- For older cars, consider selling and paying off
Inflation rapidly diminishes the value of cars. Paying off an auto loan early limits this depreciation damage to your net worth. Every extra month unpaid adds to the inflationary hit.
Pay Off Mortgages
Mortgages are often the largest debt obligation Americans carry. Rising inflation can significantly impact budgets for anyone buying a home with financing. Paying off a mortgage early conserves interest expenses.
Make extra principal payments whenever possible to reduce the loan term. Refinancing to a lower rate with a shortened term can work dramatically to pay off a mortgage faster. Be cautious of adjustable rate mortgages, as payments may rise with inflation.
Strategies for Mortgages
- Make extra payments toward principal
- Refinance to lower rate and shorter term
- Beware adjustable rate mortgage hikes
Owning a home provides security against inflation driving up rents. Paying off the mortgage early provides protection against uncertainty of future income. This hedges against inflation risks.
How to Prioritize Payoffs
With multiple debts and limited funds, deciding what to pay off first can be challenging. Here are some tips for prioritizing payoffs during inflation:
- Pay minimums on all debts
- List remaining money available
- Pay extra toward highest interest rate debt
- Once paid off, move to next highest rate
- Consider consolidated fixed rate loans or refinancing
- Review budget frequently as inflation impacts costs
Running the numbers to see total interest paid on each debt can help optimize the order. Online calculators can show whether consolidation loans or refinancing make sense for your situation.
Here is an example debt payoff priority:
| Debt | Balance | Interest Rate | Min. Payment |
|---|---|---|---|
| Credit Card 1 | $5,000 | 19% | $200 |
| Credit Card 2 | $8,000 | 15% | $160 |
| Auto Loan | $12,000 | 5% | $300 |
| Student Loan | $25,000 | 4% | $200 |
| Mortgage | $200,000 | 3% | $1,000 |
Based on the high interest rate, Credit Card 1 would be paid off first. Then Credit Card 2 would be paid off. The auto loan, student loan, and mortgage can be tackled in order as each prior debt is paid in full.
Budget Changes During Inflation
As inflation drives prices higher, it is wise to reevaluate budgets frequently. Look for areas to cut back discretionary spending and redirect cash to debt payoffs. Avoid taking on new consumer debt that will just add to inflation problems.
Housing, food, gas, and healthcare prices tend to rise rapidly during inflation. Budgeting extra cushion in these areas is prudent. Add contingencies for possible rate hikes on adjustable debt or higher caps on variable expenses.
Consider adding secondary income streams such as freelancing, consulting or side businesses. This extra cash flow can supplement regular earnings being eroded by inflation.
Tips for Budgeting During Inflation
- Cut discretionary spending
- Add contingencies for essentials like food and gas
- Plan for capped adjustable debt to potentially rise
- Look for ways to increase income
- Reevaluate budget frequently as inflation changes
Trimming excess spending and redirecting that money toward payoffs is crucial. Even small reductions accumulate. Adding income expands possibilities for paying off debts faster before inflation escalates costs further.
Investment Considerations
Inflation not only impacts debts, but also savings and investments. Stocks, bonds, cash and other assets react to rising inflation in different ways.
Stocks tend to be an inflation hedge over the long run, as company revenues and profits trend up. But significant volatility can work against short time horizons. Bonds do poorly as inflation rises and interest rates follow. Cash continually loses value at the inflation rate.
Some assets like Treasury Inflation-Protected Securities (TIPS) and real estate directly offset inflation. Commodities like oil, metals and agriculture act as inflation hedges. Crypto is newer, but also gains appeal for some investors to counter inflation.
Investment Options for Inflation
- Stocks over long periods
- TIPS (Treasury inflation-protected securities)
- Real estate
- Commodities like oil, gold, agriculture
- Crypto assets like Bitcoin
Maintaining some portfolio exposure to stocks, commodities, real estate and inflation-indexed bonds can provide balance. This diversification hedges against different inflation scenarios. Periodic rebalancing keeps allocations in line with targets.
But no investment is a sure winner against inflation. Paying off debt has a more predictable return equal to the interest rate. That is a guaranteed offset against inflation erosion.
Conclusion
Rising inflation threatens the economy’s recovery from the pandemic. Paying off debts with focused intensity can provide financial protection and stability.
By methodically targeting high interest rate debts first, consolidating loans strategically, and making diligent extra payments, you can offset inflation. This will limit wasted money toward interest and optimize cash flow.
Refinancing loans to lock in lower fixed interest rates is another weapon against inflation uncertainty. Trimming expenses, adding income streams, and rebalancing investments create additional leverage against inflation.
Review all debts, create a payoff plan, consolidate strategically, make diligent extra payments, and stick to the payoff schedule. Staying disciplined, even when it seems difficult, can help overcome the challenges of inflation.
Financial freedom from debt and protection against inflation is within reach with focus and determination. Paying off debt faster will grant the peace of mind we all strive for, especially during uncertain economic times.
