Whether you’re planning to manage your debt yourself or enrolling in a debt management plan, paying off your debt will ultimately lead to saving more money. The main point is to go into your strategy knowing that this isn’t a quick fix. But over time you’ll build up a nice emergency fund while also paying down your debt.
Here are 5 steps to embrace financial stability and save more money:
- Look at your spending.
Before you can begin to save or pay down debt, you need to know where all your money goes each month.
- Calculate your monthly expenses, including mortgage, utilities, groceries, gas, and car payment.
- Calculate what you spend each month on recreation, including entertainment, eating out, streaming services, and cable bills.
- Calculate all your unsecured debts like credit card debt and student loans.
- Begin to save.
Start by depositing money into a high-interest savings account so that your money will accrue. While some experts recommend saving six months of living expenses, starting with saving three months can give you a cushion so you’re less likely to use your credit card should an emergency arise. Once you have a cushion, it’s time to start repayment.
- Choose your repayment method.
There are two primary ways to pay off debt that are recommended: the debt avalanche and the debt snowball. The debt avalanche dictates that, while still paying the minimum balance on your other cards, you focus on paying more toward the one with the highest interest rate. This method tends to be the most popular because you’re more quickly eliminating high-interest credit cards that will cost you more over time.
The debt snowball is where you pay more toward the loan you owe the least amount on, because you’ll pay it off more quickly and be able to apply those dollars onto the next card.
Once you’ve decided on your method of attack, it’s on to the next step.
- Decide how much will go to savings and to repayment.
Here’s where you’ll need to strategize how much goes to savings and how much goes to repayment each month. The 50/30/20 rule suggests that 50% of your income goes to household expenses, 30% goes toward recreation and wants, and 20% goes toward debt repayment and savings. Tweaking this approach to prioritize saving more and paying off debt will limit your recreation for the time being, but it’ll be well worth it in the long run.
By paying down your debt, over time you’ll ultimately have more to put toward savings while also building good financial habits.
- Try a debt management plan.
If you need help with any or all of the above, seeking credit counseling might be your best option. A counselor can help you enroll in a debt management plan, where they’ll work with your lenders to lower your interest rate and consolidate your loans into one, affordable monthly payment, all to be paid off in three to five years. The counselor will also help you build a budget so that you can commit to saving each month.
By managing your debt, you’ll be able to save enough money eventually to aid you in an emergency and secure a retirement fund for the future.
Ready to save and repay your debts? CCCS of Northeastern Iowa offers credit counseling, debt management, and financial literacy workshops.