As soon as one becomes financially independent, one tends to focus on debt repayment.
Student loans are the priority, then credit card payments. And amongst these loan payments, one might forget to save money.
But it is important to have the green bucks for your future, especially in an inflation-prone economy.
However, it might seem next to impossible to save money and pay off debt at the same time.
This blog will be your guide for the same.
It takes some money management skills and financial goal setting to achieve the impossible.
Basic Requirements
There are 5 basic requirements to save money and pay off debt.
First, trace your income and expenses once-a-month. This is a practice that helps you notice if you have a surplus or if you are in deficit. This further helps you decide the course of your money ahead.
Second, an obvious requirement would be to have healthy saving habits. You must spend part of your income to meet your daily necessities, but it is vital to put some amount in your savings fund.
Third, it wouldn’t be possible for you to either save more or pay off your debt quickly if you do not stop using credit cards. You need to keep a watch on your expenses. Do not overspend. Do not spend carelessly.
Fourth, always have an emergency fund. Whether you are putting all your money into repaying debt or putting it in a savings account, create a safety net. This emergency fund is different from your savings account.
Fifth, this is the most important. You must believe it is possible and have patience to manage your money in an intelligent way, with the help of this blog, because it takes time, but it is possible.
Measures To Save Money And Pay Off Debt
(1) Create A Roadmap
If you are new to saving and paying off the debt business, it is crucial that you build a roadmap.
A roadmap is a plan of how much of your income needs to go for savings, for paying off debt, for emergency funds, for daily expenses and miscellaneous spending.
This roadmap will be defined by your financial goals. Financial goals can vary from person to person and may even depend on the financial condition of an employee.
Financial goals can be like – fund for children’s education, retirement fund, traveling fund, healthcare fund, homeownership etc.
(2) Determine Sure Savings Objectives
It is crucial to define what your savings objectives are. Whether you are working towards saving a goal or wanting to pay off debt.
Here it is necessary to worry about how much paying off debt could cost you in regard to interest rates, penalties or other charges.
For instance, your payments towards credit cards. If you pay more than your minimum payment for credit cards, your credit scores won’t decrease easily.
Further, if you pay more than the minimum payment, it can lower your interest payment.
| Interest Rates | Number of Payments |
|---|---|
$10/month | |
3% | 115 |
6% | 137 |
$30/month | |
3% | 35 |
6% | 36 |
12% | 40 |
This table provides the difference between making minimum payments and paying more than on credit cards.
Here, the supposed minimum payment is $10 on a $1000 debt in comparison to paying $30 per month.
Thus, it will take a lower amount of pay if you pay more than the minimum payment.
It might be that you can’t pay the full statement balance, so stick to paying the minimum payment which would help you avoid any penalties or extra fees.
(3) Count Your Debts
Sticking to the roadmap includes having knowledge of how much exactly your debts’ value is.
This also covers being secure with your monthly recurring bills like, utility bills, rent, children’s school fees etc, before you take up debt repayment expenses.
If, for any reason, you miss payments for your debts or make the minimum payments, it can affect your credit score and make you pay more with charges and fees like late fees etc. such charges, when added overtime can cost you an arm and leg, and instead of being put in for debt repayment or savings account your money would be going in vain.
For instance, suppose you made a late minimum payment of $100 on one of your student loans in June.
With late fees ranging between $25 to $50, now you would have to pay $150 or so instead of $100, thus costing you an extra $50.
This $50 could have gone to a savings account and helped you in future.
(4) Create A Budget
When deciding your financial goals, it becomes critical to create a budget, which indicates how much money is to spend on which activity.
There are several apps as well to help you create a budget and help you manage your money well.
There is a very common 50-30-20 budget rule.
According to this, 50% of your income goes into expenses for necessities like housing, utilities-electricity, water, food etc.; 30% would go for wants, non-essentials and the rest of 20% would go for savings.
Pro Tip: 30% seems too much for non-essentials like eating out, movies etc, when you are trying to pay off your debt and save at the same. It is better to spend even less on wants or non-essentials for some time.
(5) Develop A Buffer
This is a kind of safety net for you. You need to develop a buffer in your checking account, the account through which you pay all your debt payments.
This buffer will help you to pay for your debts when you don’t have enough money otherwise for that particular month.
For instance, suppose you have to pay $100 every month for your debt repayment, but in April, 2023, you were able to pay this amount and were able to develop a buffer of another $150 dollars.
And so, in June,2023, when you can’t pay, suppose because of extra spending on necessities because of inflation, you can pay for your minimum payment from the buffer.
Pro Tip: You can automate your payments so as not to miss any payments and avoid late fees or additional charges.
(6) Save More
As said, save more and spend less. Before you open a savings account, make sure to look for different interest rates being offered.
Some may be more than others. Make sure to choose the one with the most interest rate so as to earn you bucks overtime.
As informed earlier, spend less on things that are not necessary. Focus on the budget that you created and avoid any wasteful spending.
You can automate your savings just as you can automate your debt payments.
This will help you in the way that money will be automatically saved in your savings account before you look at it in the checking account.
Best Budgeting Apps For Easy Money Management
(7) Tax Planning
If you have a low to moderate income, you can plan your taxes in a way that you can pay off your debt along with saving tax money.
If you have a debt that includes a mortgage, it is smart for you, as you don’t have to pay taxes on the capital gains from your primary residence.
Also, there is no tax levied on the returns that you get for paying off your debt.
Money Saving Strategies
Here are a few money saving ways to help you start saving:-
(i) Earn Extra
You can always earn more to save more.
Take up a side hustle like weekend social media manager, or freelance writer, baby sitting or anything that interests you and you could take out time for.
Pro Tip: Make it a rule to add all the earnings from the side hustle to your savings account and do not use this money for any of your expenses.
(ii) Conserve With Groceries
For your trip to the grocery store make sure to make a list. This will help you save time, energy and money.
Also, sticking to the list will help you to avoid buying anything which is not essential.
Buying raw and producing ingredients instead of prepackaged meals can be cheaper to buy and help you save more.
(iii) Cut-off Subscriptions
If you are aware of any subscriptions that are wasteful or unused for a long time now, call them off.
Think of how much money you could save every month with just small subscriptions cut.
For instance, Netflix’s basic plan costs $9.99/month and Amazon Prime Video’s basic plan costs $8.99/month. This adds up to $18.98/month.
This is just when two of the basic plans are added. If you have a Disney or Hulu subscription, the cost will go up. Cut those extra subscriptions today.
(iv) 30-day Rule
In order to save more, it is vital that you spend less. You can try the 30-day rule for the same.
If you want an item even after 30 days of wanting it first, then buy it, but if you no longer feel like it, don’t buy it. This will save you money.
For instance, if on 2nd June you wanted a polaroid for your college assignment. You took up the 30- day rule and on 1st July, you found the alternative.
In general, printed photographs and you no longer need the polaroid. This money is saved now.
Debt Repayment Strategies
Here are a few debt repayment ways to help you pay quicker:-
(A) Snowballing Method
This method instructs you to pay your debts in an order. List all your debts in ascending order.
Focus on the smallest loan and put all your energy and money into repayment of this loan.
The smallest loan could be the least amount to pay. But make sure to pay the minimum payment of other loans at the same time, by just making more than the minimum payment for one particular debt.
And repaying the second smallest after and moving further down.
For instance, if you have three loans to pay for. One of them is $1000, the next is $5000 and the third is $10,000.
According to the snowballing method, you will be paying more than the minimum payment for the $1000 debt and, for the other two, you will be paying just the minimum payment until your $1000 debt is paid off completely and you move on to $5000.
(B) Stacking Method
This method instructs you to pay your debts in order as well. List all your debts in descending order.
Focus on the highest interest rate loan and put all your energy and money in for repayment of this loan.
The highest interest rate, regardless of the loan amount, must be on the top.
But make sure to pay the minimum payment of other loans at the same time, by just making more than the minimum payment for one particular debt. And repaying second highest after and moving further down.
For instance, if you have three loans to pay for. One of them has an interest rate of 18%, the next has 12% and the third is 6%.
According to the stacking method, you will be paying more than the minimum payment for the 18% interest rate debt and for the other two you will be paying just the minimum payment until your 18% debt is paid off completely and you move on to 12%.
Conclusion
To save money and pay-off debt simultaneously might seem like a difficult task to do. But if you follow the correct roadmap, it can be done.
Taking care of your debts before you start saving might be suggested by some. But make your own financial goals and thus, decide upon the way you want to go.
For some, it might be more important to save for the future depending on their current financial situation.
Take account of your income, expenses, debt amount and need for savings and devise your plan.
