How to Save Money While Paying Off Debt

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Should You Save While Paying Off Debt?

If you have more debt than you’d like, you’re not alone. The average consumer has $5,910 in credit card debt, according to the latest Experian data. You may feel torn about what to prioritize—paying off debt or building your savings. The good news is that it doesn’t have to be an either/or situation. Chances are you can tackle both at the same time. It comes down to organizing your finances and making a plan. Here’s how.

Why It’s Important to Save While Paying Off Debt

A strong emergency fund is critical. Your emergency fund is your financial safety net. If you run into an unexpected expense, this money can help you get over the hump. That may be as small as a minor home repair or as large as losing your job. The rule of thumb is to set aside three to six months’ worth of expenses in your emergency fund.

You could miss out on years of investment gains. If you wait until you’re entirely debt-free to start saving for retirement, you could miss out on years of compound interest. This can enable you to supercharge your nest egg by growing your wealth faster. Waiting too long to get started can significantly diminish your retirement savings.

Not all debt is bad. Some types of debt can improve your quality of life and set the stage for long-term financial wellness. Student loans might provide an education that improves your job prospects and earning potential. Taking on a mortgage could get you into a home that increases in value, resulting in significant profit. In other words, having some debt to your name isn’t always a bad thing.

How to Balance Saving and Paying Off Debt

1. Get Organized With Your Finances

Organize your debts. List out every open balance, along with the interest rate and minimum payment. The goal is to clarify how much debt you have —and how much it’s costing you.

Revisit your budget. Begin with your monthly take-home pay, then account for your monthly spending. That includes essential bills, your monthly debt payments and discretionary spending such as shopping and entertainment. If your total expenses are greater than your income, you’ll need to take steps to rein in your spending.

Track your spending. Look back on your debit and credit card statements from the last few months. It can bring your spending patterns into focus. You might also notice wasteful expenses that you can eliminate, like memberships or subscriptions you don’t use.

Determine how much extra income you have each month. The ideal scenario is to earmark 20% of your take-home pay for financial goals. That can be split between saving and paying off debt. If you can’t squeak out that much, start small and set aside whatever you can.

2. Set a Savings Goal

Your savings goal will be unique to you. Begin by taking stock of your emergency fund. Don’t beat yourself up if it’s nonexistent—the best time to begin saving is always now. If saving three months’ worth of expenses feels intimidating, start with something more manageable. Maybe you set a goal to build a mini emergency fund of $1,000.

Now think about when you’d like to achieve that goal. For example, saving $100 a month will get you there in 10 months. Your monthly budget will likely determine your timeline. Let’s say you have $500 a month to put toward saving and debt. You might divide it up like this:

• $100 in your emergency fund
• $300 toward debt
• $100 in a retirement account

3. Choose a Debt Repayment Strategy

There are several strategies to pay off debt. They include:

Debt snowball: With this method, you’ll focus on your lowest balance first. You’ll continue making minimum payments on your other accounts, but you’ll throw extra money toward your smallest balance. Once that’s paid off, you’ll move on to the next lowest account.

Debt avalanche: This is the same idea as the debt snowball, except that you prioritize the account with the highest interest rate. High-interest debt is costing you the most money in the long run.

Debt consolidation: This involves taking out a debt consolidation loan—ideally with a lower interest rate than what you’re paying now—and using that to pay off all your balances. You’ll then have one new balance and monthly payment. You could also use a balance transfer credit card with an introductory 0% interest period. Both options typically require a good FICO® Score (above 670).

4. Contribute Enough to Your 401(k) to Get an Employer Match

Some employers will match some or all of their employees’ 401(k) contributions. If this applies to you, it’s wise to contribute enough to get that employer match. It’s basically free money. It isn’t uncommon for plans to match between 3% and 5% of employee pay. And thanks to the power of compound interest, that money could grow exponentially over time.

It’s something to think about when deciding how much to save each month. With that said, it still might be a balancing act.

How to Avoid More Debt

No matter where you are, you’ll want to take steps to avoid more debt.

• If you use a credit card, aim to pay off the balance in full each month.
• Stick to your budget (and get back on track if you blow your budget).
• Automate your savings and build a strong emergency fund.
• Put cash windfalls, like tax refunds and work bonuses, toward debt and savings.
• Reduce your expenses to curb overspending.

The Bottom Line

You don’t necessarily have to choose between paying off debt and building your savings. It’s possible to do both and to strike a balance that feels right for your budget. No matter where you are on that journey, eliminating debt can help improve your credit score in a real way—and that’s no small thing. You can check your credit report and credit score for free with Experian.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals!

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