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
But if you are trying to pay down credit card debt and student loans, there are ways to pad your savings accounts and get rid of your debt obligations if you follow a few key strategies.
Set Up An Emergency Fund
An emergency fund will enable you to weather rough patches, including unexpected expenses resulting from accidents or injuries, that aforementioned job loss, major home and car repairs, or last-minute plane tickets. You may be tempted to shave a month or two from your emergency fund to pay more into your monthly credit card balance. Don’t. You will want an emergency fund to tap into so you don’t go further into debt dealing with emergencies down the road.
Set Up Buckets
After your emergency fund is set up, look at major expenses you anticipate down the line and divide them into timeframes of short-, medium- and long-term. Then back into how much you need to save to have enough cash funds to pay for them. Say 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 you’ll need to save $694 each month toward this goal. Not in the budget? Give yourself more time, or lower your price point. 3
Boost Your 401(k) Contributions
Break out your calculator for this one. That’s because when it comes to paying off debt while investing in your retirement savings, there is no “one-size-fits-all” answer.
However, it’s common to aim for a 10 percent retirement savings rate while fully employed. So, factoring in what your employer matches, you want to save so that your total yearly savings amounts to 10 percent of your annual income. 4
Make Savings Automatic
What you can’t see you won’t miss. So goes the thinking behind automatic savings.
It works like this: After you’ve set up your emergency fund and calculated the savings you need for your short-, medium- and long-term goals, have that money deposited directly from your checking account in separate savings accounts. By doing this, it won’t sit with your other funds for incidentals like groceries, gas, insurance and car payments, and you won’t be tempted to spend it on items for which it’s not allocated. 5
It requires just a few steps: setting up an online savings account, and completing employer paperwork to have deposits directed to your new bank.
Pay Off High-Interest Debt First
Once you’ve got your emergency savings sorted, it’s time to tackle your debt. If you have more than one debt, many financial experts suggest tackling the higher-interest debt loads first. The positive? You pay less overall interest than if you started with your lower-interest debts. The negative? It may take longer to close your debts out if you have the largest balance on the highest-interest debt. 6