One of the most frequently asked financial questions is how to pay off debt and save money at the same time. Paying off debt is an important factor for building financial security and wealth and is just as important as saving money for emergencies and retirement. Some financial experts advise their clients to focus on paying off debt first because the interest paid on those loans will more than likely exceed the interest you earn in any savings or investment account. This may be true, but if an emergency arises, you will not have a cushion to help you through it. It is believed that paying off debt and saving for emergencies and retirement can be done at the same time. Here are a few tips on how to pay off debt and save money simultaneously.
Prioritize Your Debts
The best way to pay off debt quickly is to prioritize your loan pay off. Simply write down all of your debt including the current balance, the interest rate you are paying, and your monthly payment. Then prioritize the loans to be paid off first, second, third, and so on. This will help you determine how to methodically tackle the debt.
Pay off loans with the highest interest rates first. Make the minimum payments on all debts, then make an additional payment to the one with the highest interest rate. Not only will you pay less interest overall, but you will be able to pay off the loan more quickly. Once that loan is paid off, apply the loan’s payment amount to the next loan with a high interest rate. Continue this method until all loans are paid in full.
Plan your savings
What are you saving for? Whether you are saving for emergencies, retirement, or a down payment on a home or car, the answer to that question will be your goal and will help you stay focused on saving when times get financially tight. Here are a few practical ways to save while paying off your debt.
- Start where you are! It does not matter how much you save in the beginning. All that really matters is that you start saving something. Putting all of your loose change in a jar every day will begin to add up. When the jar is full, deposit the money into a savings account. Setting aside even $5, $10, or $20 in a savings account every payday will also grow your savings.
- Automate your savings. You cannot spend what you do not have. If you feel that you will be tempted to tap into your savings jar or hit the ATM to access the money in your savings account, you may want to have a certain amount or a percentage of your pay automatically deducted from your paycheck and directly deposited into a savings account that is not easily accessible.
- Take advantage of retirement savings. Be sure to participate in your employer-sponsored retirement savings plan, such as a 401k or 403b, especially if your employer will match your contribution.
It does not have to be one or the other. You can both pay off debt and build your savings if you prioritize and plan your spending. If you want to talk to someone about the best way to get started, call or visit a nonprofit credit counselor for help with your budget and to get advice about savings.
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