When you’re in debt, adding money into your savings account instead of paying what you owe may feel counterintuitive. This is a common challenge for many people when managing their finances. However, putting money aside each month into an emergency fund or other savings account, while reducing debt, is essential to help you achieve financial stability.
In this advisor article, I’ve provided some tips to help you boost your savings even if you have debt, so you can be prepared for the unexpected and stay on track toward your financial goals. Let’s dive in.
Steps to Save Money While Paying Off Debt
1. Get an Overview of Your Finances
Before building your savings or paying off debt, it’s essential to get an overview of your finances. This includes evaluating your income, expenses, and debts. Once you know the complete picture, it is easier to create a budget and determine how much you can allocate towards debt payments and savings each month.
2. Set a Savings Goal
The purpose of having savings—whether in a checking account, savings account, or other liquid investments—is for near-term spending needs or emergencies. I recommend creating a savings goal to cover 3 to 6 months of living expenses. A common rule of thumb is to save at least 10% of your income. Of course, saving more is even better, but 10% is a good goal to start with and can be sufficient for quickly accumulating an emergency fund balance.
Once the emergency fund reaches your goal amount, reassess the situation to identify whether paying down debt would be better than accumulating any more savings. Debt repayment can be considered a form of “saving” in that it helps to improve your net worth and potentially create additional liquidity by improving your available credit.
3. Prioritize Debt Payments & Pay Off Debt
The next step is to determine how much debt you owe, then create a strategy to spend it down. One strategy is to organize your debt in order of highest interest rate to lowest, and work at paying off the highest interest debt first. This can save the most interest over the course of a debt repayment plan.
Another strategy is to list your debt account balances from lowest to highest. If you apply any excess monthly savings to the lowest balance first, you will eliminate that account—and its required monthly payment—sooner. Then you will have cleared up more excess monthly savings to roll into paying on the next smallest debt.
4. Don’t Forget About Insurance
Since saving money and paying off debt are entirely dependent on your income, another essential element is to have an appropriate amount of life and disability income insurance. Disability income insurance can help replace most of your income if you experience an injury or sickness that puts you out of work. Life insurance can help ensure your spouse or other loved ones can pay off any remaining debt and establish a sufficient savings balance in the event of your death.
We’re Here to Help
There’s no doubt that balancing your debt and savings goals can be a challenge. However, with consistent and smart decision making, it’s possible to build a healthy savings account while reducing your debt. The most important thing is to have a plan.
At TruStone Wealth Management, our experienced team of financial advisors can help you create a customized plan for your financial future, explore insurance options, and reach your short- and long-term goals. Reach out to request a consultation with our staff today.
I'm here to help you feel more confident about your financial future.
Learn more about me
Read more articles by JP Stender