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A Bankrate study reveals that 36% of Americans have more credit card debts than savings. Emergency savings remain a significant worry for most consumers, with over half of them feeling uneasy about the amount they have set aside for emergencies.
If you’re one of these people and want to break free from the vicious cycle of debt, read one. This post will share easy-to-follow tips on paying off your debts while saving enough for rainy days.
Be Realistic About Your Financial Situation
First up, make a list of all your debts. Write down things like your credit cards, student loans, whatever you owe money on. Be sure to include the interest rate and minimum payment for each one. This method will help you see how much you owe overall and how much interest each month costs you.
Next, take a look at your budget. Figure out what you bring home each month after taxes. Then, track where your money goes — bills, debt payments, and things like shopping and going out. If you spend more than you make, you’ll need to scale back on some things.
While you’re at it, review your credit and debit card statements from the past few months. Seeing where your money went can help you spot things you don’t need, like memberships you never use. Cutting back on unnecessary expenses is an excellent way to save some cash.
Finally, calculate any extra income you have each month after essentials. Try to put 20% of your pay towards goals like saving up or paying down debt. But if that’s too much, don’t sweat it—even a little helps. The important thing is organizing your finances so you know where your money is going.
Set an Amount for Saving
You must set a savings goal that works for you. Start by thinking about your emergency fund — how much money you’d need to cover expenses if you lost your job or had some considerable unexpected cost.
Don’t stress if you haven’t started saving yet. It’s never too late to get it sorted out. If saving up three months’ worth of expenses sounds like a lot, consider building a smaller mini fund first, like $1,000.
Once you know your goal, think about when you want to reach it. For example, saving $100 monthly would take ten months to hit a $1,000 goal. Your monthly budget is going to dictate your timeline.
After expenses, you have $500 free each month — you may want to split it up like $100 to the emergency fund, $300 to pay down debts, and $100 into retirement. You can open a savings account online to compel yourself to save.
How to save quickly
If you’re looking to boost your savings quickly, here are some practical things you can try.
First, save on groceries. Lowering your food spending is a fast way to increase your savings. Opt for fresh produce and raw ingredients instead of pre-made meals since those can often be cheaper.
Also, most grocery stores have rewards cards or loyalty programs that give you access to special deals and discounts for free.
Second, cancel any subscriptions you aren’t using. It’s easy to end up with more monthly subscriptions than you need. While each one may seem small, they can add up over time.
Go through your subscriptions honestly, and if you last used one at least a month ago, consider canceling it. That frees up more money you can put towards your savings each month.
You can always resubscribe later, like for a new season of your show, and then cancel again. If recurring payments and free trials are hard to manage, look into tools that can help.
Observe the 30-day rule
Are you looking to curb impulse spending? Try implementing the 30-day rule.
When you come across something you desire, wait for 30 days before making the purchase. If you still want it after this period and it fits your budget, consider buying it. However, you’ll save that money if your desire fades during this time.
Pick an Appropriate Debt Repayment Strategy
There are a few different strategies to consider when paying off debt.
First up is the debt snowball method. With this, you make minimum payments on all your debts except for the smallest balance, which you throw all your extra money at until it’s gone. Then, you move on to the next smallest debt.
The debt avalanche is similar. However, instead of starting with the smallest balance, you focus on the debts with the most burdensome interest rates. This approach saves you more money in interest in the long run by targeting those incredibly high-interest rates upfront.
Another option is debt consolidation. With this, you take out one new loan or do a balance transfer to roll all your debts into monthly payments at a lower interest rate than you currently have. This simplifies things into one payment but can save you on interest if your credit is good enough, usually above 670.
Make Enough Contributions to Your 401(k)
It’s essential to contribute enough funds to your 401(k) to find a full employer match if there is one. Most companies will match a portion of what you put in, usually 3% to 5% of your paycheck. That employer match is free money into your 401(k). And with compound interest over time, those matched funds can add up.
When figuring out how much you can save each month, hit the match amount at least. But also ensure you have everything else covered, like your other bills. It’s about finding a good balance. The employer match is free money, but you must prioritize rent, utilities, and other responsibilities.
Leverage Balance Transfer Offers
A balance transfer card is one effective way to pay down your credit card debt. These cards let you move debt from one card charging a high interest rate to a new card offering 0% APR for a set period, usually up to 21 months.
During that time, with no interest, you’ve got several months to pay down what you owe without accruing any additional charges. It’s a handy way to save money and make progress on paying off what you owe. And even if you can’t transfer all your balances at once, it still helps knock some of that debt down.
Paying off anything transferred before that promotional rate ends is the only thing to watch out for. Once it’s up, the interest rate jumps way up again. So, just take advantage of the 0% period to eliminate that debt. Balance transfer offers can help if you time it right.
Take a Side Gig
If you spend more than you make, using credit to cover the difference will take longer. You must learn to find a balance.
In addition to budgeting carefully, take on some extra work like a side gig or doing some jobs through apps or websites. That can provide additional income to help fill out your household budget.
The cost of living is getting high, stretching many family budgets thin. It’s not just about cutting back on expenses; you must also find ways to boost your income, even temporarily, to tackle that credit card debt.
Every dollar you save in your budget is money you can put toward paying off your debts. It doesn’t need to be a permanent solution; it’s a strategy to reach your goal of getting out of debt.
Image by Avery Evans on Unsplash
It’s Possible To Pay Debts and Save
You don’t have to make an either-or decision between paying off debt and saving money. Pursuing both simultaneously and finding a balance that aligns with your budget is feasible.
Whether you’re just starting or well into the process, reducing debt can significantly enhance your credit score and help you build financial stability.