Your credit card debt has an interest rate of 22 percent. Meanwhile, your savings account is offering an interest rate of just one percent. It can seem that focusing all your efforts on paying off your debts, rather than focusing on paying debts and savings together, can make sense. But, if you don’t have any savings set aside, you risk ending up in the same situation all over again. It could be even worse the second time around, as you might not be able to get enough credit to cover your costs. Instead of focusing on one or the other, here are some tips to help you focus on debts and savings at the same time.
Trimming Spending
No matter how much you plan on devoting to paying off your debts and how much you plan to put towards savings, to accomplish either goal, you’ll most likely need to cut back on your spending habits. Taking a close look at your current budget, or putting a budget together if you don’t have one already, can help you see where you have room to cut back. If you’re unsure how to make a budget or have questions about the best way to go about paying your debts or creating savings, working with a credit counselor can help. A counselor can look at your specific financial situation and give you advice on making a budget and a plan for reaching your financial goals.
How to Divvy Up the Money
Once you have a budget and a clear sense of how much money you have to work with each month, you want to figure out how to best divide up the money and determine how much will go towards debts and how much towards savings. The answer really depends on how much debt you have and the interest rate on it, as well as how much you have in savings already. If you have high-interest debt, you might want to pay more towards debt than you would savings each month. For example, if you have $500 for savings and debts monthly and have $5,000 in credit card debt, at an interest rate of 20 percent, you might want to start out by putting $400 or so towards debt monthly, setting aside $100 or so in an emergency fund.
A general rule of thumb to follow is to focus on debts with the highest interest rates first, then shift your attention to lower interest rate debts, such as student loans or your mortgage. Once you have a suitable amount set aside for an emergency fund, usually between six months and a year’s worth of income, you can focus on saving for longer-term goals – such as retirement or your child’s college tuition.
Keeping It Up
One of the advantages of saving while paying off your debts is that you’re getting in the habit of setting money aside monthly, which will help you avoid overspending in the future and will offer you some protection against an unexpected expense. Even after you’ve paid off your debts, put the amount you were putting towards your loans into your savings to keep up the momentum.
The combination of creating a budget, reducing debt and increasing savings will help you pave the way towards a successful financial future. Paying your debts off is an important goal, but it’s not the only goal worth your time or attention. Let one of our credit counselors help you get back on track, today!
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