Taking on your debts could take some guts, but it's an important step in improving your financial status and laying the foundations for a secure and prosperous future. Even though it's tempting to put every extra dollar toward paying off debt, it's also necessary to put some away for savings. Here's how you can strike a balance between these two financial goliaths and triumph in both.
Set Up An Emergency Fund
If you're working to pay off loans, you'll generally want to put every dollar you have into minimizing your outstanding debt. If you have additional cash, paying it to your debtors will help your debt decline faster. This will help you save more on interest and speed up the process of becoming debt-free.
However, before you empty your bank balances by making additional payments to your debtors, there's one more financial task to achieve. Ensure you have emergency savings set aside. This should take precedence over making minimum repayments on bills.
Putting money in a high-yield emergency fund to be used in an emergency could seem irrational. Even so, this money will be kept in a low-interest earning account as you keep repaying your debtors at a substantially larger interest rate.
The issue is that when you don't set up an emergency fund while paying off debts, you could find yourself with unforeseen bills that you might not be able to afford. If you're struggling to make ends meet and putting all of your extra money into debt payments, you'll be in serious financial trouble if you get stuck with unanticipated hospital bills, and car maintenance, among other unforeseen expenses.
In this case, the most probable outcome is that you'll have to borrow again, lowering the progress you have made to pay off the debt. This could ruin your drive and morale, making it far more difficult to pay back what you owe in the long run. You may also become ensnared in a loop wherein you pay off part of the debt, load up your credit cards once more, and continue the cycle again and again and never become debt-free.
As horrible as this seems, it could get worse. Certain emergencies are inevitable and cannot be resolved by borrowing more loans. When you have lost your job, you will not be able to effortlessly borrow money to pay your debts since lenders are hesitant to give money to those who are unemployed or have no earnings.
You wouldn't want to be unable to take out loans or struggle to come up with the money you urgently need or be pressured to take out loans that could nullify the progress you have made. To avoid this, make it a priority to build an emergency fund before sending a large sum of money to your debtors.
Take Stock of All Your Liabilities
Make note of your debts so you understand precisely how much money you owe. It can be hard to choose the best way to proceed without this information.
This entails ensuring that you can handle your monthly expenses without taking on more debt. After all, if you skip a payment, you could be charged banking penalties and late charges, which can quickly mount up. Your credit rating could suffer as a result of missed payments. Also, if you're paying penalties, that is cash that could have been better spent on debt repayment or building your emergency savings.
Keep records of all obligations in a worksheet, including monthly installment amounts, interest rates, balances, as well as a current total sum of the debts. Keep updating it monthly when you repay your creditors.
Make a Realistic Budget and Stick to It
The first stage in determining how to save money to pay off debt is to understand how you spend your money. Allocate as much cash as you can for emergency savings and debt repayment, but leave some for "fun" as well, since most individuals will find that it's hard to keep to an overly vigorous budgeting plan for an extended period.
A budget can assist you in determining and achieving any long-term goals you have. If you simply go about life aimlessly, spending your money on every dazzling, shiny thing that catches your eye.
A budget drives you to plan out your priorities and goals, save money, monitor your achievements, and turn your aspirations into reality. We know it hurts when you find out you can't afford the brand new video game or the stunning designer shoes. However, if you know why you are putting money away into your savings, it will be a lot easier to leave empty-handed.
Save Money Automatically
You might have observed that nearly every financial coach or money consultant has a similar bit of advice for accumulating wealth and putting money aside more quickly: automating your savings. Even though this money-saving strategy isn't new, it does work, and it is all because of psychology.
Money automation is more popular than you could imagine when it comes to handling your finances. When a portion of your salaries is automatically put into the employer-sponsored 401(k) plans, you see it working. Without having to directly send money into a savings account, a percentage of your pre-tax income is withdrawn from your paycheck and saved for retirement.
How many individuals would contribute consistently if we all had to decide how much money each check needs to go toward the 401(k) per each payment cycle and then make the transfer?
Automation assists you in avoiding present bias. Being human, you might have a strong desire for instant gratification. You could be biased toward your current self when presented with a choice, such as if to spend during a sale or make investments, so you're more inclined to make the decisions that would reward you the greatest at the time. This is referred to as present bias.
The choice appears to be less essential the further into the distance it is. Whenever it comes to planning for significant future expenditures like buying a house or planning for a wedding, this might become a major obstacle. And it's one of the main reasons why putting money away for retirement is so difficult.
You can, nonetheless, eliminate present biases by eliminating the opportunity to pick between spending and saving. That's where having your savings automated comes in handy.
When you are involuntarily registered in a 401(k) employer's plan and begin paying 3% (or even more) of every salary to it, you do not have the option of placing the 3% toward your retirement or utilizing it for anything else since you don't ever see the money in your checking accounts.
You don't have to worry about it since automation assures that you are making payments to our retirement accounts that will grow over time. When financial advisors encourage you to automate your savings and investments to grow your income, it is because the technique truly works
Build a Checking Account Buffer
When you start your financial journey, you should have a prioritized financial action plan. A checking account buffer should be a must-have in your to-do list when it comes to money as well as budgeting.
Building a buffer for your checking account stops you from falling into credit card debts. It enables you to contribute to various campaigns whenever you feel compelled to do so. It also acts as a backup when unexpected expenses arise.
A checking account buffer is a set sum of money that remains in your checking account at all times. You never plan on spending it in a single week. However, if you want to, it is available. When it falls below the projected amount, you recharge it during the next budgeting session.
Your buffer is an overdraft that you have built for yourself. It also saves you time and money by avoiding bank charges and embarrassment.
Reevaluate Your Automatic Subscriptions and Memberships
From Amazon prime video to Spotify to maybe the newspaper, we spend a lot of money on services and goods we use regularly through monthly subscription services. But are you blowing your money? If you are not careful, the recurring subscriptions you pay for these services will put a dent in your pocket. Many companies will go on to deduct cash from your accounts even though you haven't utilized their products in months. That is why it is crucial to take stock regularly.
Any subscription services you don't utilize regularly should be canceled. Also, whenever you make purchases, remember to turn off any auto-renew options. If you discontinue your subscription and realize you can't live without it, you could subscribe but only if it matches up to your new, strict budget.
Cut Down Your Grocery Budget
When you're attempting to save money when you are in debt, the first thing that comes to mind is probably not how you can save money on your groceries. You might consider your mortgage or rent, your auto payments, or the monthly bills you receive in your mail. However, food is often ranked second only to mortgage or rent in a regular family budget.
Most individuals are surprised to learn how much money they spend on grocery shopping each month after creating a budget. It is so easy to go through the aisles, picking up a pack of Oreos here along with several bags of chips, and then topping it off with delightful treats at the registers. However, those small purchases (also known as budget busters) mount up quickly and wind up ruining your budget each month.
Plan your weekly meals and take a hard look at what you currently have in the pantry before going to the grocery store to save more money on groceries. Why do you want to purchase more of the things you have? Also if you're serious about saving money and sticking to your budget, you need to leave the children at home as you go shopping.
Would you like to save money as well as time? Try ordering groceries online and having them delivered. It's available at most major stores (sometimes for free) and could save you a lot of money. Going to pick up the groceries eliminates the urge you could have felt if you smelled those freshly made chocolate chip cookies wafting across the aisles at the store. In other terms, you're compelled to follow your grocery list and prevent impulsive purchases.
Even though most household expenses are not adjustable, your grocery bills are. With some forethought, you could substantially lower your shopping spending while still saving a few hundred dollars in your monthly budget.
Pack Your Lunch Or Eat At Home
Food has a reputation for becoming a monetary strain, whether it's overspending on your favorite treats at the supermarket or eating out each week. Having lunch at your favorite restaurant with your coworkers is a great way of bonding. Eating out at or picking up food from a restaurant is an easy alternative after you have had a long day at the office.
However, eating out raises your expenses, and most people could end up in debt, and get stuck with poor credit as a result of going over the top. Luckily, when it comes to food expenses, it's easy to save money. By making your lunches and dinners, you can save a lot of money regularly.
Create a list of several easy-to-make dishes to begin saving money. The internet could become your friend in this situation. There are many easy-to-follow recipes available on the internet that can keep a string of typical dinners from becoming monotonous. Purchasing a slow cooker can also help you improve by reducing the amount of time you use while cooking.
Get a Library Card
Before you can buy a new book, look to see if you could borrow it from your local public library. You could borrow the books or magazines that you would normally pay a couple of dollars for. However, you would like to ensure to return the borrowed items on time to help avoid incurring fines for anything returned late.
Buy Generic Items
Giving up name brands is without a doubt one of the best methods to save money. In most situations, brand items are only better because of their marketing. Take a peek at that box, for example. Their logo is just stunning! And that's pretty much the end of it. Generic medicines, essential foods (such as beans and rice), cleaning products, and paper items are much less expensive than their brand-name counterparts, and they function just as well.
Cut Ties With Cable
It is no news that cable costs are skyrocketing. The typical monthly cost of cable TV, along with all charges, is more than $217 per month, which amounts to more than $2,600 per year. The great news is that cable is no longer the only means to view your favorite TV shows. Stop using the cable and find out how to save money by using network apps or streaming services as replacements for cable.
But keep in mind that this isn't the place to get all giddy about subscription services. Only subscribe to streaming services that you intend to use. When you subscribe to just about everything, you can end up paying much more than you do on cable.
Spend Any Additional or Unanticipated Funds Responsibly
Put money to good use whenever you receive a significant work bonus, an inheritance, or even a tax refund. And by "good use," we don't mean putting fancy new stamps into your collection of stamps or simply stashing it in the account to linger there.
If you still have debt, you'd be better off spending those earnings to repay your college loans or your credit card debt than putting the money away.
Increase Your Earnings
Often you can barely stretch your existing earnings so much. If that's the case, search for a part-time job that is transitory or seasonal, or create a business on the side to supplement your earnings. If you are using all of that extra money to pay off your debt, you'll be debt-free faster than you thought.
Keep Your Motivation As You Work to Pay Off your Debt
Although it's natural to prioritize your highest-interest bills first, and besides, they are the ones that usually cost you the most, prioritize your smaller debts instead. This practice, known as the "snowball technique," entails paying the smallest outstanding payments on bigger bills while actively paying off the lowest.
After you've finished paying off the lowest bill, move on to the next lowest obligation, and so forth, till you have paid off each of your debts. This strategy is more emotionally rewarding because you'll take it like you are making progress faster and will be more driven to continue paying down your debts.
Find a San Diego Bankruptcy Lawyer Near Me
If you are having financial difficulties and have become overwhelmed by debt, the San Diego Bankruptcy Attorney can assist you in assessing your debt status and advising you on if or not to declare bankruptcy. If filing for bankruptcy is not an option, our lawyers can guide you on other options for dealing with debt and saving money. Contact us at 619-488-6168 to learn more about legal solutions to resolve your debt issues today.
