Everyone knows you should save for the future, but if you also have debt, it might seem tricky to figure out which should be your priority. For most people, the answer is both. Balancing savings and debt-elimination doesn’t have to be difficult, but it sometimes requires a bit of planning. Here are some pointers on how to save money and pay off debt at the same time.
Set Two Achievable Goals
In order to reduce your debt while saving money, you need to set a realistic goal for each. A good way to do this is to designate a percentage of your income to set aside as soon as you get paid. Then decide how much of that amount to deposit into savings and how much to put toward your debt.
Eliminating high-interest debts like credit cards first makes financial sense, simply because the 18 to 20 percent interest many credit card companies charge can add up quickly. However, it’s also important to have an emergency fund of at least three months of income, in case you experience a job loss or other emergency.
Don’t Underestimate the Cost of Your Debt
High-interest debt takes money from your checking account that you could otherwise put toward your future. Consider this: If you have $1,500 on your credit card and your interest is 18 percent, paying only the minimum of $37 per month means it would take over thirteen years to eliminate the debt completely, costing you $1,760 in interest. However, if you put just $10 more toward your monthly payment in addition to the minimum, you’ll have the debt eliminated in under four years and only pay $557.59 in interest.
Reduce Your Spending
Creating a budget and tracking your spending is a sure-fire way to identify extra money that can go toward your goals. This may mean packing your lunch for work instead of eating out, or postponing your vacation this year. If your goal was to create that emergency fund by saving 10 percent of your earnings, it would take you two and a half years to get three months’ income set aside. Nudge that up to 20 percent and you could reach the same goal in half the time — just 15 months.
Prioritize and Look for the Best Return
Each person’s financial situation is different and life circumstances can change dramatically over time. For example, if your employer matches your 401(k) contributions, you’ll get a 100 percent return on every dollar you invest. So you may want to maximize your contributions, even if it will take longer to pay off your debts.
Similarly, if you’ve paid off all of your high-interest loans, it may be time to start siphoning more money into your savings or investments. Whatever your financial situation is, it’s also important to look over your strategy every few months to ensure your plan is making the most of your money.