Seven simple ways to strike a balance between savings and debt
3 min read
Saving money isn’t an easy task. It’s even harder for those who owe a lot of money. Paying off debt is important. But, it’s more important to have an efficient plan to get rid of this financial burden as it can help you save more and reach your goals faster.
Follow these few tips that can help you save money while paying off your debts –
- Emergency fund
Many people pay off their debts first before saving anything for the future emergencies and this is a solid reason for start savings . But one should not follow this approach. The first thing you want to do when it comes to saving and paying debt at the same time is to establish an emergency fund because life is unpredictable and therefore, if you keep some amount in your emergency fund, it can pretty much cover the most basic emergencies such as your medical bills home repairs, etc. Also, if you create an emergency fund, you don’t have to rely on more debt to get out of that situation. It is advisable to start your emergency fund with at least $1000. Or, you can also start your emergency fund with your savings for 3-6 months.
- Saving for retirement
The next option is to save for your retirement. People only focus on paying off their debts quickly, but they should also make sure to keep something aside for their retirement. If you are employed and your company offers you a retirement savings plan, especially if there’s an employer match available, try to contribute at least enough to get the maximum employer match.
- Say no to non- essential expense
The other option is to eliminate all the expenses which are not essential. These expenses can be unnecessary gym membership expenses or credit card fee that is withdrawn from your account every month. Monitor your expenses by going through your monthly bank statement to make sure you don’t have any money leaks. This way you can save a lot without any much effort.
- Create a budget
This is one of the most essential approaches to save money while paying off your debts. Without a budget, you won’t have any idea how much money you owe and how much money you can afford to save each month. Your budget will help you track your income and expenses and it is the most efficient way that can help you to keep your expenses as low as possible so that you can save more and clear your debts on time.
- Decide your debt and saving percentage
After excluding all the expenses from your Income, decide what percentage of your remaining income you want to save and what percentage you want to use to pay off your debts. You can follow the 95/5 approach under which, 95% of your remaining income is contributed towards your debt and 5% is put into your savings account. For example, if you have a leftover income of $50, then you can keep $47.50 toward your debt payment and $2.50 toward your savings account.
As your debt amount starts decreasing, you can shift to 80/20 approach and further to 60/40 approach depending on your financial situation.
- Pay your debts
Once you have saved enough amount of money, you can start paying off your debts. But that doesn’t mean that you must stop increasing your savings. Prepare debt pay- off plan and list which debt you can afford to pay off first every month. Also, determine how long it’ll take you to pay off all your debts.
- Focus more on high-interest debts
Another important factor you must consider is the rate of interest you’re paying on your debts. If you are paying high-interest debts such as credit cards and student loans, you’re paying more than you owe by making minimum monthly payment. Thus, it is better to pay high- interest debts first as it will save you a lot of money over a long- term.
After paying off the first debt, start working on your next debt and repeat this until all your debts are paid off. Yes, it may take you a few months or maybe years, but if you prepare a plan, you will reach your goal.
