How to Save Money While Paying Off Debt
We are not a country of savers. In fact, the average American puts just under 5 percent of their disposable income toward savings. Most financial advisers would agree that this is not enough to ensure a comfortable retirement. 1
Whether you are trying to pay off debt related to credit cards, personal or student loans, there are ways to pad your savings accounts and pay your debt obligations if you are able to follow a few key strategies.
Determine Which Method Will Work Best for Paying Down Your Debts
There are a few different methods that can be used to pay down consumer debts. One is called the â€śhigher interest rate methodâ€ť, which refers to tackling debts that has the highest interest rate first. Then, once it is paid off, you focus on the debt with the next highest interest rate. Experts suggest that the benefit to doing this is that you eliminate the most costly debt first, which can lift a huge weight off your shoulders. Another method that is often suggested is referred to as the â€śsnowball methodâ€ť, which focuses on the smallest debt first. Once you pay off that debt, you move on to the next smallest debt. The benefit to this method is thought to be that you may see progress a bit more quickly, particularly if you have many small debts.
Ultimately, it is up to you to decide which method will work best for your financial situation. The CFPB offers a fantastic debt management worksheet that will help you come up with an action plan and organize your outstanding debt payments. 2
Ensure That You Have Adequate Savings
Make sure you have enough savings to cover the cost of your living expenses, should you lose your job or find yourself unable to work for a period of time.
MoneyUnder30.com has a great savings calculator to help you figure out how much you should aspire to have in savings.
Set Up Major Expense Buckets
After you have made progress on accumulating adequate savings, you should next begin to identify major expenses you anticipate in the future and assign them based on short, medium and long-term expenses. Then, back into how much you need to save to ensure you have saved enough cash to pay for these expenses when they arise. Say you think you will need a new car in three years, and you expect it to cost $25,000. Divide that number by the amount of months you will be saving for it (36) and you will find youâ€™ll need to save $694 each month toward this goal. Not in the budget? Give yourself more time, or lower your price point.
Boost Your 401(k) Contributions
Break out your calculator for this one, because when it comes to paying off debt while investing in your retirement, there is no â€śone-size-fits-allâ€ť answer.
According to CNN Money, most financial advisers would recommend investing 10-15% of your income towards your retirement. They also recommend starting this healthy financial habit in your 20â€™s. 3
Make Savings Automatic
What you canâ€™t see you wonâ€™t miss. So goes the thinking behind automatic savings.
It works like this: After youâ€™ve set up your savings fund and calculated the savings you need for to achieve your short to long-term goals, you should have that money automatically directly deposited into separate savings and checking accounts. By automating the process, your savings is simply a separate account, and money you should begin not to miss in your checking account.
It requires just a few steps: setting up an online savings account, and completing employer paperwork to have your paychecks automatically directed into the appropriate accounts.