Whether you accrued debt buying holiday presents or have been in debt for years, paying off debt is a common goal for many as they enter the new year.
If you want to become debt free this year, odds are your goal is to put extra money toward each debt. But you might also want to save money at the same time. Balancing debt repayment with saving money can pose a challenge. Paying off debt requires motivation and focus but with the right plan, you can save money and pay off debt at the same time.
If you’re wondering how you can save money while paying off debt, this post offers a plan for accomplishing those two goals simultaneously.
It’s hard, but it’s not impossible.
Not Saving When Paying Off Debt Is Risky
First, ask yourself if you should try to save money while you’re paying off debt. It’s a personal but necessary question to ask on your debt repayment journey.
Remember that unexpected expenses occur all the time and they won’t spare you because you’re trying to pay off debt. If you don’t have enough money to cover emergency costs, you’re pressured to go back into debt to pay them.
Should this happen, you immediately cancel out any progress you made on your debt. If you’re going to forego saving money while paying off debt, do so only if you have a short debt repayment journey but still realize the risk you’re taking.
If the idea of not saving any money makes you uncomfortable, realize you don’t have to save a ton of money. Simply come up with an amount that makes you feel secure to cover any potential emergencies.
For instance, the popular Dave Ramsey Baby Steps plan recommends saving a small emergency fund of $1,000 while you’re paying off debt.
Even that amount makes me uneasy. I understand that it’s important to throw as much as you can toward debt if you want to pay it off ASAP. However, when you don’t save money, you put yourself in a vulnerable state.
A bank like Barclays lets you save with no minimum balance and pays 1.85 percent – so you make something on your cash and remain liquid.
When I was paying off debt, I chose to save at least one month’s worth of expenses and it made me feel more comfortable. If you want to know how to save money while paying off debt, here are a few things you can do.
Develop a Clear Debt Repayment Plan
If your priority is to pay off debt, it’s important to develop a clear repayment plan and strategy. Find out how much you owe, what the interest rate is on each debt, your target debt-free date, and how much you can put toward debt each month.
It’s best to write down this information. You want to see exactly where you stand and where to start. Once you have this information, it will be easy to plan out your progress.
For example, let’s say you have $30,000 of debt. You plan to put an extra $500 toward your balances each month after minimum payments. You can budget for this amount and start making regular payments to stay on track.
Don’t overlook the ability to lower your interest rate. This is the best way to pay off debt fast and pursue other financial goals. If you have credit card debt, one of the best ways to do this is with a personal loan.
Fiona by Even Financial is the best option to find a personal loan to pay off debt. They let you compare up to 17 lenders to find the best personal loan for your needs.
It takes less than a minute to fill out the application, and within a few minutes they provide possible matches.
If you have student loans, Credible is a good option to refinance or consolidate your loans. Credible provides you refinancing options within two minutes, and the average person using Credible saves nearly $19,000 on their student loans!
Once you determine a plan and a way to lower your interest rate, you want to put it into action. As you come across additional money, you can decide if you want to put it toward savings or debt. Either way, you’re still making progress.
Start Setting Aside Smaller Amounts in Sinking Funds
Sinking funds are a great way to start saving for easily forgotten regular expenses like:
- Car registration
- Six-month auto insurance payment
- Car repairs
- Gifts and other holiday expenses
Expenses like these can be stressful when they come up and you don’t have money available. This is why you should start setting aside small amounts each month. To make it even easier, put the money into different accounts with their own target savings goal.
If you can commit to saving $100 per month, CIT Bank is another good option as they pay .40 percent interest.
Where you save is inconsequential to the act of saving. Find a way to save for known expenses so you don’t throw off your debt repayment journey. If you need ideas for saving more money, check out these different ways to save money each month.
Make Extra Money
Making extra money is a great way to help you pay down your debt faster, but you can also use that same income to save money. This works best if you have a side hustle with a high earning potential or a partner who can earn extra money.
Below are a few ways to make extra money while paying off debt:
- Ask for overtime at your day job
- Deliver meals with DoorDash
- Be a personal grocery shopper with Instacart Shopper
You can even make money in your downtime by filling out surveys. You won’t get rich, but they’re a great way to make several hundred dollars per month while watching TV. Here are a few of the best survey sites to use:
Survey Junkie: One of the best survey sites in the space and they pay cash directly to your PayPal account.
Pinecone Research: They pay $3 per survey and they pay by Amazon Gift Cards or virtual Mastercards, or you can select from a variety of gift cards. However, if you’ve joined Pinecone in the last 30 days, your first redemption must be by bank transfer to verify your rewards account.
There are many side hustle ideas. Find one or two that work for you and throw your earnings at debt. You can also hold some back and put it towards savings.
Keep Some Retirement Contributions When Paying Off Debt
When you’re paying off debt, you don’t have to completely cut your retirement contributions. You can just lower them instead. This can be helpful if you have a 401(k) plan through your employer. If you’ve not yet started saving with one, here’s how to set up your first 401(k).
As time goes on, compound interest will help grow your savings and you don’t want to miss out on those earning years. Your 401(k) contributions can also reduce your taxable income. Plus, they are deducted before you receive your paycheck so you won’t miss the money.
*Related: Looking for other ways to save money? Check out our top options to lower your monthly bills and put more funds back into your budget.*
If you have other retirement accounts like an IRA, you can also lower contributions so you can still invest but prioritize paying off debt. Don’t worry if you’re not able to max out your contributions each year; you can focus on that once you get out of debt.
Saving money while paying off debt is possible. It takes work, but you can do both at the same time. You just need determine how much you’re comfortable saving while making sure it doesn’t interfere too much with paying off your debt.
Sure, saving money during the debt repayment process means it will take you longer to pay off that debt. In the long run, though, it provides added financial security and reduces the likelihood of getting back into debt.
Do you think it’s wise to save money while paying off debt? What’s one thing many overlook when trying to pay off debt? What financial goal do you have for 2021?