4 Tips on Prioritizing Debt Payoff and Savings

We all want to be more responsible with our money. While that sounds great in theory, it can get confusing once you start to break things down. Emergency funds, savings funds and debt all need to be addressed regularly, but trying to figure out a consistent method leaves some paralyzed with indecision.

One of the problems that tends to trip people up is prioritization. Allocating your finances to the right place is crucial, but how do you decide how much to put towards any one purpose? How can you cut through the confusion and get your finances on the right track?

We have a few suggestions that may help.

Tackle The Small Emergency Fund

You need to save at least a partial emergency fund first. If you don’t have one and have to face a crisis, you’ll probably need to borrow the money. By borrow we mean using those credit cards that got you in trouble in the first place. That means you’ll end up in more debt – whether you owe a family member or a credit card company.

A basic emergency fund should be around $1,000. That will cover minor emergencies like new tires after your car has a blowout on the highway, last-minute plane tickets to a funeral, or a brief ER visit.

Each time you deplete your emergency fund, halt any other debt-reducing or saving until you build it back up. Once you’re debt free, you can focus on building a more substantial emergency fund, covering between three to six month’s worth of expenses.

Refinance Debt

Before you start paying off your debt, you should find other ways to reduce it. If you have high-interest credit card debt, do a balance transfer onto an account with a 0% offer. See if you can refinance to get a lower interest rate for your other debt, including car loans, mortgages and student loans.

When you refinance, make sure that your new loan doesn’t extend your terms. The longer your loan, the more you’ll pay in interest. You should use the refinance as an opportunity to save money, not spend more of it.

After you refinance, keep making the same payments you were previously. Doing so will shorten how quickly you pay off your debt without forcing you to make any changes to your lifestyle.

Create A Debt Payoff Plan

Once you’ve weighed your options of refinancing, you should focus on becoming debt free and creating more money to throw at that debt. There are two ways to do this – lower your living expenses or increase your income.

You can increase your income by asking for a raise, finding a new job or starting a side gig. Working an extra 10 hours a week at $10 an hour will yield about $400 a month before taxes for instance. We live in an era of gig economy so finding a easy gig hat works for your local area will not be too hard (uber, fiverr, upwork, doordash, etc,.)

To decrease how much you need to live on, you should find areas of your budget that you can cut. Do you eat out too often or have a yoga studio membership that goes unused? Are you paying too much for car insurance or internet/cable? Take the money that you cut from your budget and apply that to your debt payments.

You can pay off your debt with one of two strategies – the snowball or the avalanche method. The snowball method definitely keeps you motivated, as you will see faster results. The avalanche method saves you the most money and makes more sense mathematically.

Once you’ve paid off your debt, put the money you were spending on monthly payments and beef up your emergency fund. Now you’ll be saving for yourself and your future instead of paying off old debt. Again, the idea here is 3-6 months worth if you a not self employed and single. At least 6 months if you are married and or have kids or illness. 6-9 months if you are self-employed.

Focus On Saving For Retirement

The general rule of thumb is that you should put between 10-15% of your income towards retirement. While some people advocate for focusing all your efforts on debt payoff, putting money toward retirement now can save you money later.

Why? Because saving for retirement is designed to be a long-term approach, and the most important aspect of saving for retirement is time. The more time you spend saving, the more you’ll have – simple as that. That’s why putting a little bit away for 40 years is better than putting a lot away for 20.

“A 28 year-old that saves $5,000 a year into a retirement account – if they average 8% and retire at age 68 – should earn approximately $1,295,000,” said CFP Peter Creedon of Crystal Brook Advisors. “To match the $1,295,000, a 40 year old would have to contribute $13,583 a year until retirement if we use the above parameters.

Wrap Up

Better-spending has a few things to say despite popular opinion.

  • Millennials will most likely need to have $1.8 million or more by retirement age(66-70). Please adjust your contributions to reach this goal.
  • We also recommend considering IRA along with your 401-K from age 30 onward.(taxes suck)
  • Take advantage of high yield online saving accounts.
  • Never ever finance a car. If you absolutely have to, go with 36 mo term or less and use a down payment. If you cant afford the payment at 36 mo, you definitely cannot afford the car.
  • Lastly, a great start to your savings is 3 months worth of net expenses, then increase to 3 months worth of net income, until you get to 3 months worth of gross income.

Published by jemvolition

Freelance Writer/Author

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