6 Steps To Saving Money And Paying Down Debt At The Same Time
Finding a balance between saving money and paying off your debt can be difficult. With student loans and credit card debt hanging over your head, saving that cash for later may not make sense. No doubt, it’s tough to budget for both, but saving money and paying off your debt is totally doable and seriously important.
“You have to pay down that debt” Shannon McLay, founder of The Financial Gym, told Swirled. “But you need to do both, pay off that debt and build up your assets.”
McLay founded The Financial Gym in 2015 and has built up a network of financial trainers to help clients get healthy and fit when it comes to their personal finances. One question clients often ask is how to balance the money they’re paid every month — should they save more or pay down their debt fast? The answer is to do both, and here’s how.
1. Budget, budget, budget.
If you’re working to save money and pay off your debt, then you’re most likely working with a budget (please say you are). If you’re not, then start with the simple 60-20-20 rule and put 60 percent of your monthly income toward living expenses (AKA, all mandatory bills), 20 percent toward savings and 20 percent for whatever you want (like a mani/pedi or dinner with the girls).
If that budget doesn’t work for you, you can do 80-20, where 80 percent covers your mandatory bills and 20 percent goes toward savings, or even 85-15. Do whatever works for you.
2. Automate your savings.
Once you know how much you can save per month, automate it. Almost all banks offer this feature. All you need to do is set up automatic transfers between your checking and savings accounts for specific days of the month, such as your paydays. Then, just type in the percentage or specific amount you want to be transferred between accounts. Super easy, right?
“If you need to pay more bills, you move it from your savings account to your checking account,” McLay said. “It’s not the end of the world. Just try to do it.”
If it’s not in your checking, you’ll be able to save more money without even realizing it. According to Chime Bank, customers who signed up for the automatic transfer feature saved 2 to 3 times more than those customers who didn’t. If your take-home pay is $3,000 per month, and you’ve budgeted 20 percent toward savings, set up automatic transfers of $300 from every paycheck you receive. You’ll end up saving over $7,000 after just one year.
3. Take advantage of your repayment options.
“People make the argument that you don’t want to pay interest, but the interest you pay on your debt is actually a convenience fee to have flexibility around your money,” McLay said. “People with $100,000 mortgages would never expect to pay off a mortgage in five years because that’s not the point of it.”
She’s right. Homeowners aren’t in a rush to pay off their mortgages because they understand the investment. The same goes for student loans. Paying down your student loan debt fast could help save you money in the long run. It’ll also give you one less bill to pay every month. However, if you’ve got a low monthly payment with a good interest rate, there’s really no rush.
Consider your repayment options. Look into:
- Consolidating multiple loans into one loan with one monthly payment.
- Refinancing private loans so you have a lower interest rate, a lower monthly payment and more time to pay off the loans.
- And the terms on your loan for flexibility that can help you if you make less money at a new job, are laid off from work, can’t work due to health issues or have another life-altering event. You may be able to change your repayment plan to meet your needs.
4. Plan for the short- and long-term future.
McLay and her team are big believers in having people think about what they’re working for since most people aren’t working to pay down their student loans or other debt. Instead, make sure you are managing your debt and then saving as much as you can every month.
Start with a savings goal of three months’ worth of living expenses. Then shoot for six months. Eventually — and we mean over the course of a year or two — you’ll have a nice emergency fund stashed in your savings in case you ever need it.
“It should never be a surprise to have a $1,000 emergency,” McLay said. “The only thing that should be a surprise is the type of emergency. Do you have a health care emergency or a crazy roommate and you need to move out? Maybe it’s a wedding you didn’t expect or four new tires on your car. There’s always something that’s going to happen that’ll be a financial drain so having cash is just the best way to manage through those times.”
Once you have your emergency fund established, you can then pay down that debt faster, putting extra money toward the principal. This way, you have the money you’ll need for the short term in your account while you work on paying down the debt for your future.
5. Be smart with windfalls of money.
A windfall of money is a large amount that you receive every once in a while, such as during income tax season, birthdays, holidays or another reason. Before taking your $1,000 tax return check and putting it all toward your student loan debt principal, consider distributing it between both your savings and your debt.
“Take a pause and say, ‘What do I have coming up in my life in the next six months to a year?'” McLay said. “What’s the most strategic use for this money based on that?”
If you want to pay down your debt aggressively in the next year, then put the windfall toward the loan’s principal. If you’re saving for a new car, put the money away for later. You can also try following the same strategy as your budget, putting 60 or 80 percent toward your loan bill and 20 percent toward your savings.
6. It’s all about the balance.
At the end of the day, paying off debt and saving money are both very important priorities. However, don’t let one rule your life over the other.
“There are other things in life you want to do,” McLay said. “There are so many other things in life to do so it’s important to take a balanced approach with your money.”
With balance, you’ll be able to stress less about where your money is going, while also knowing that you’re on the road to being financially fit and stable.
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