Some people believe it makes more sense to save money than pay down debt. But there are benefits to both, and it’s possible to strike a balance between adding to savings and paying down debt.
Simple strategies can help. Try using automated savings to siphon money out of your paycheck each payday, or put cash windfalls like tax refunds and work bonuses toward debt and savings goals.
1. Set a budget
If you’re serious about reducing debt and saving money, a budget is one of the best tools in your arsenal. Start by gathering all your income and expense information, such as pay stubs, credit card statements and savings account balances.
Then break your expenses down into categories, such as needs, wants and savings. Needs include essential expenses like housing, utilities and food; wants are those you could live without, such as entertainment and dining out; and savings includes additional debt repayment or contributions to your retirement fund.
Once you have all your data, compare your net income to your total monthly expenses. Doing this can help you determine if there’s room in your budget to make adjustments, such as cutting back on non-essential spending.
Then, track your spending regularly, whether that’s at the end of each day or once a week. Keeping track of your spending is one of the most important parts of budgeting, so don’t give up on it if you find it difficult or time-consuming at first.
2. Prioritize your debts
Paying off debt can seem daunting, especially if you have multiple accounts and aren’t sure which one to prioritize. Generally speaking, it’s best to pay off your highest-priority debts first, such as credit card balances. This method of repayment is called the “debt snowball” or the “debt avalanche” method and can help you save money in the long run because it reduces your interest charges.
Other high-priority debts include child support, which is a legal obligation that can lead to jail time if not paid; utility bills, such as water, electricity and gas, which are essential to your family’s health; and car loans, which can keep you from getting to work if they’re not paid. There are also loan and debt relief programs that can help you get back on track.
As for medium-priority debts, these include monthly payments that are important but you can delay without serious consequences, such as mortgage payments or auto loans.
3. Make more than the minimum payment on your debts
While paying off debt is a priority, it’s also important to save money. The easiest way to do this is by setting aside part of your windfalls like tax refunds or work bonuses for debt payments instead of spending them on something else.
Bankruptcy lawyers in Harrisburg, PA may tell you that you can also save money by reducing unnecessary spending. Reviewing your debit and credit card statements can help identify wasteful expenses like memberships or subscriptions that aren’t serving you well. Alternatively, you could try a budgeting technique that involves using cash and envelopes to help you control your spending.
If you’re able to pay more than the minimum payment, do so whenever possible. This helps you avoid late fees, reduces your total debt amount and lowers your credit utilization ratio — all of which are good for your credit score and financial health. Plus, it’s an effective way to quickly make a dent in your debt balance.
4. Set aside money for emergencies and irregular expenses
Having an emergency fund and socking away money for retirement are great goals, but it’s also important to save for things that come up on a regular basis. It can be helpful to review your bank and credit card statements to identify these expenses. Using a savings calculator can help you determine how much to set aside to cover these types of expenses.
You may also find that there are certain times during the year when you receive a windfall of money, such as tax refunds, birthdays or holiday gifts. If you’re able, try to save all or at least a portion of this money.
This can be a great way to build up your rainy day savings or start a vacation savings account. Another strategy is to calculate purchases by hourly wage, which can be a helpful reminder of how much it really costs to indulge.
