Managing Debt in Blended Families: Navigating Financial Freedom Together
Dealing with debt in a blended family can be challenging. Oftentimes, the debt is related to decisions made prior to bringing your families together. It may have been partly created by your spouse’s ex, or the debt may be entirely yours. Regardless of where it originated, debt is a sensitive topic further complicated by the extra circumstances existing in a blended family.
In fact, debt can be so uncomfortable to talk about that people avoid taking the steps needed to manage it once and for all, leading to a cycle of indebtedness. Sure, they make their minimum payments on time, but they don’t want to think about it beyond that. As you’ve likely figured out, burying your head in the sand won't make debt disappear.
Thankfully, debt doesn’t have to weigh you down forever. Having a proactive plan to manage debt is possible and will be one of the greatest financial gifts you can give yourself and your blended family. You see, debt not only robs you of things for today, but it also quite literally robs your future self. And I’m not just talking about money here; by tackling debt, you're securing financial stability and reclaiming joy and freedom in life.
Here are three steps to dealing with debt in your blended family.
Step 1: Face the Truth
Confronting debt head-on is the first step towards regaining financial stability within your blended family. Ignoring the issue only prolongs its grip on your life. Start by having an open and honest conversation with your spouse about your financial situation. Breaking the silence surrounding money matters is essential; it's the first step in taking away debt’s power over your family.
Next, explore your money history and values together. Understanding how the debt accumulated and identifying any recurring patterns is key. Discuss your attitudes towards debt and outline its role in your family's finances. For example, is it just meant for buying a house and nothing else, or will you also take loans for kids’ college expenses? By aligning your expectations and values regarding debt, you lay the groundwork for crafting a unified approach to managing debt moving forward.
Your discussion about debt is probably only one part of a larger conversation with your spouse about uniting your finances. For practical advice on merging your financial worlds, we recommend reading our eBook, The Perfect Blend: A Comprehensive Guide to Combining Your Blended Family's Finances, where we explore strategies to smoothly integrate your financial lives.
Step 2: Break the Cycle of Debt
Debt has a sneaky way of perpetuating itself, trapping you in a cycle of financial strain. You diligently make payments for a while, only to be blindsided by unexpected expenses like car repairs or appliance breakdowns, forcing you to rely on credit cards once again. Escaping this cycle demands proactive measures, starting with establishing an emergency fund.
Ideally, your emergency fund should cover at least three months' worth of expenses, providing a financial safety net for unforeseen circumstances. Unlike investments, this fund should consist of readily accessible cash. If you find yourself entrenched in a debt cycle, recognize that breaking free may require significant sacrifices. Begin by scrutinizing your budget and identifying areas where expenses can be trimmed to prioritize essential needs and “must pays” so that you can start building an emergency fund. While the journey may entail sacrifices, the long-term benefits of financial stability and freedom from debt are well worth the effort.
Step 3: Attack Your Debt
With your emergency fund sufficiently padded to cushion against unexpected expenses, it's time to turn your attention to tackling your debt head-on. Debt reduction now becomes a prioritized goal, integrated into your broader financial planning alongside retirement, college funds, and other aspirations. As you embark on this journey, your budget will play a crucial role in allocating funds towards debt repayment. You can learn more about budgeting here.
To accelerate debt reduction, you'll need to pay more than the minimum monthly payment. If you've freed up room in your budget to establish a cash reserve, the funds initially earmarked for filling your emergency fund can now be redirected towards paying extra towards your debt.
When strategizing your repayment approach, consider whether you prioritize psychological victories or pure financial gains. Opting for a "debt snowball" approach involves clearing the smallest debt balances first, offering quick wins that boost motivation. Alternatively, adopting a "debt avalanche" strategy targets debts with the highest interest rates, maximizing long-term financial savings.
Ultimately, the most effective method depends on your personal preferences and financial objectives. By committing to a proactive debt reduction plan, you're taking decisive steps toward achieving financial freedom and security for your blended family.
Let’s look at an example.
Jane and John have a blended family with five kids. John came into the relationship with a car loan and a student loan and carries a balance on two credit cards. With two kids in college and two more about to graduate high school, Jane and John have been increasingly stressed about their budget and financial future.
John feels a little guilty about the debt, understanding that Jane had no part in its accumulation. However, they both acknowledge that his financial obligations affect their collective future. They both realize that to truly build their future together, they need to get a better handle on the debt and their budget. After a candid conversation, they decided to trim unnecessary expenses, like dining out, to bolster their emergency fund.
Having allocated $150 monthly to their cash reserve, they now have nearly two months’ worth saved and are ready to confront their debt. They divert the extra $150 monthly towards paying off credit card #1. Once that debt is settled, they funnel the $150 plus the original minimum payment from credit card #1 towards credit card #2, turbocharging their debt repayment plan with an additional $220 monthly.
This method allows Jane and John to eliminate all their debt in less than five years! In contrast, if they continue to make only minimum payments, it will take nearly 15 years to pay it all off and cost about $8,000 more in interest. You can find online calculators to help you with your debt calculations, such as this one.
The important takeaway is that confronting debt directly and adding a little extra payment each month can tremendously impact your financial life. You don’t need to be overwhelmed by debt.
If you're looking for help navigating the financial complexities of a blended family, let's talk. We're here to guide you through creating a unified financial plan for your blended household. To get started, click here to schedule a call.
Based in St. Paul, MN, Endurance Financial Group is an Independent Registered Investment Advisor partnering with blended families to combine their household finances in a unified financial plan that works for all members of the family. They can be reached by phone at 651-605-2318 or online at efg-planning.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.