Tips to Save Money When You Are in Debt
More than 2,000 years ago, the Greek philosopher Aristotle stated: “through discipline comes freedom.” To achieve freedom from debt requires a level of discipline many Americans are not accustomed to. But, if you deploy the right combination of tips to save money with unwavering discipline, freedom from debt is within your reach.
Winston Churchill and Benjamin Franklin share credit for the quote “failure to plan is planning to fail.” When it comes to money, there may be no better phrase that encapsulates the importance of taking control of your finances.
Although planning for the unexpected can be difficult (see emergency fund below), there are many areas of our lives we can get financially ahead of. Take groceries for instance. By taking just 15 minutes to check your local store’s sales flyer can result in some delicious savings. And when at the store itself, stick to your list! Retail stores of all kinds know how to “sneak” items into your cart.
Grocery shopping is a weekly task for many. Budgets go awry when non-regular recurring expenses finally pop-up. Haircuts, automobile servicing, and shopping for school clothes can quickly pile up on credit cards. Review your non-recurring expenses and save a proportionate amount each month to effectively pre-pay these debt building charges.
Debt isn’t always the result of wasteful spending. For many, debt is accumulated out of necessity. Medical bills, house maintenance, or automobile repairs sneak up when few options besides pulling out your credit card are available.
Most financial experts agree. Having an emergency fund equal to three months of expenses should be your financial foundation. With debt, however, it may seem counterintuitive to idly let money sit on the sidelines. However, having cash available is what can prevent even more debt to pile up.
Your emergency fund needs to be separate from all other accounts. This reduces the temptation of using the money for something other than an emergency. Before tackling your debt, look to save $1,000 in your account. Then contribute regularly until the three-month expense goal is met.
Automate Retirement Savings
It may sound counter-intuitive, but make sure you are taking advantage of company retirement plans. Although it may be okay to take a break from contributing to a 401(k), 403b, or another program to build up an emergency fund, there are instances where saving for retirement should be done simultaneously with a debt repayment plan.
If your employer is offering a match in your retirement plan, consider contributing up to an amount equal to the maximum matching contribution level. Yes, your credit card may be charging interest rates of 10%, 15%, or higher. However, a dollar-for-dollar match in a 401(k) is providing a 100% return on your money.
So long as you can consistently reduce your overall debt month after month, funding a matching retirement plan is usually a wise move. Be cautious, however, money in a tax-preferred account like a 401(k) will have expensive penalties and taxes if you wish to withdraw funds before retirement age.
Prepare a Debt Repayment Plan
We’ve come full circle with Mr. Churchill and Mr. Franklin. Taking steps to plan for future spending, building an emergency fund, and even saving for the future may be futile if a solid plan is not put in motion to pay down your debt.
Step one is to write down all your outstanding debt balances and the attributable interest rate. Once you see the mountain, choose one of the following proven debt repayment tactics:
- The Snowball: Begin by paying the most you can toward your smallest balances first and minimum payments on the remainder. After the first debt is paid off, begin paying down the next highest debt, and so on and so forth. This strategy will reduce the number of debts you need to focus on while also creating momentum towards becoming debt-free.
- The Interest Waterfall: Pay the most you can toward your highest interest debt and minimums on the remainder. Once the first debt is paid off, repeat by again paying the most toward the highest interest debt. This approach requires more attention than the Snowball but is more cost-effective and a shorter path to becoming debt-free.
No matter which strategy you choose, become an active participant in the plan. This means reviewing your remaining debt monthly and adjusting your plan accordingly.
For many individuals and families, additional assistance is required to reach the end goal of becoming debt-free. The uphill climb may be too steep, not because of a lack of discipline or not having a plan, but sometimes the sheer size of debt coupled with high-interest rates proves too great.
There are two popular and effective options:
- Debt consolidation – Your debts are combined into a single monthly payment offering lower interest rates and monthly fees, allowing you to pay down more of your principal each month.
- Debt settlement – Working with experts, your debt is negotiated with your creditor or creditors to reduce, or in some cases eliminate credit balances.
It is wise to always evaluate your options, their terms, and any long-term financial impacts a program might have. Everyone’s situation is unique, and so should be your plan to become debt free.
Even with the best tips to save money and debt repayment plans in place, sometimes the burden of debt can be too overwhelming to overcome. If you are struggling with meeting your monthly debt obligations, contact us or apply online for a free consultation.