When backed in the corner with questions on savings, many will quickly chime in, ‘I am paying off debt.’ Student debt, mortgage payments and car loans are no excuses not to save up. Contrary to the assumption, you do not have to choose either or as you can still build your savings as you work to pay down debt. In these seven steps, we will show you how to create a plan for balancing saving with paying off debt.
1. Make Sure You Have an Emergency Fund
Before you start making payments towards debt, make sure you have an emergency fund saved up. Having money set aside for emergencies is the best way to avoid taking on more debt if something unexpected happens. We recommend aiming for at least three to six months of expenses saved in an emergency fund. Once your emergency fund is established, start tackling your debts.
2. Organize Your Debts
Organizing your debts is important when balancing saving with paying off debt. List out all of your debts with their balances and interest rates, from smallest to largest balance amounts. It will help you understand where your money goes each month and prioritize which debts should be paid first.
3. Make Minimum Payments on All Debts
Once you have organized your debts, make the minimum monthly payments while contributing something extra toward the lowest balance amount (the snowball method). It will ensure none of your debts defaults, and the lowest balance amount will be paid off faster than if only minimum payments were made on it alone.
4. Set Up Automatic Payments
Setting up automatic payments will help ensure that all of your minimum payments are made every month without fail. It will save you time worrying about manually making them each month and also save you the financial pinch of late fee payments.
5. Increase Savings Contributions When Possible
While some people see minimum payments as the easy way out, look at them as a starting point. Whether to your debt or savings, focus on increasing the monthly contributions. This will help you get out of debt faster while building up a larger emergency fund or retirement account.
6. Consider Switching Loans If Necessary
If any of your loans come with a high-interest rate or fees, consider switching them to a loan with a lower interest rate or fewer fees to save some money in the long run. Instead of paying several loans with different rates, debt consolidation allows you can focus on one with one rate and secure a lower rate while at it.
7. Monitor Your Progress Regularly
Once everything is set up, monitor your progress regularly to stay on track. Are you making progress on clearing the debt? Is there more you can do to get closer to being debt free? Ask yourself these questions and make any necessary adjustments where needed.
Wrapping Up
Who said you can’t have the best of both worlds? Save up while paying down your debt? Balancing saving with paying off debt can be tricky, but it doesn’t have to be impossible. By following these seven guidelines, anyone struggling with debt can create a plan to save money and tackle their debts responsibly over time. With patience and discipline, anyone can achieve financial freedom.