Let’s start with the age old question:
Should I save money or pay down debt?
The answer is yes.
Yes to BOTH.
We all know the importance of saving money. We also know that we should focus on becoming debt-free.
But which one should you do first?
Opinions are mixed on this one, some people advise you to pay down your debt before even thinking of saving, others say build an emergency fund first, then tackle the debt.
I say, “Why can’t you do both?”
I would focus on putting more money towards paying down the debt, while still putting a little something aside to build a fund for emergencies.
Once you have built up a buffer for any unexpected emergency costs, you can feel more at ease tackling the debt.
Of course you need to choose what works best for you and your financial situation.
In the following I will outline two methods to pay down debt, and how to build an emergency fund. Hopefully this will help you make a plan on how you can pay down debt and save money at the same time.
Incase of Emergencies
Building up an emergency fund can be helpful in your debt repayment journey, as you hopefully will have enough funds to cover the cost of an unexpected expense, avoiding the use of high-interest credit cards, and pay-day advances.
Need help building your emergency fund? Start here: Beginners Guide to Building an Emergency Fund
It is most commonly recommended to have 3-6 months worth of your expected expenses tucked away in your emergency account.
However if you are still tackling your debt, that 3-6 months starting amount can seem daunting. So I would suggest starting to build your emergency fund up to $1000.
This will be a nice buffer incase of emergencies, but keep in mind with rising costs, $1000 does not go too far these days.
But it is a start.
You can always add more to your emergency fund once you have paid down some debt, or you free up some extra cash.
Tips to grow your emergency fund quickly:
- Automate regualr transfers for ease
- Put savings in a high-interest savings account (make sure you can easily access the money)
- Come into extra money? Add more to your savings
Once you have started your emergency fund you can continue beating down that debt monster.
Paying Down Debt
Find the best method that works for you.
There are two popular methods that the finance gurus recommend, they are the Snow-ball Method and the Avalanche Method. Both will get you to your goal of living debt-free but each way has a different path.
The Snowball Method
Step 1: You will need to create a list of all your debt amounts starting from lowest to highest.
Step 2: Pay the minimum for each debt owed
Step 3: You will put any additional money towards the smallest debt first until it is paid off.
Step 4: Once that first debt is paid, you will take that same payment amount (increase if possible) and put it towards the second smallest debt on the list. This roll-over effect will continue until all debts are paid.
This is a great way to boost your motivation to pay off debt, as you will get the psychological satisfaction of crossing a debt off your list. Most people like this method as they can see their progress fairly quick, which motivates them to keep going on their debt repayment journey.
However this method of getting out of debt, usually takes more time in the long run, as you are starting at the smallest debt first and fighting against high interest rate growth.
The Avalanche Method
Step 1: Create a list of debts based on the highest interest rate to the lowest.
Step 2: Pay the minimum on each debt owed
Step 3: Make additional payments to the debt with the highest interest first.
Step 4: Once the first debt with the highest interest rate is paid, you will focus on the second highest interest rate.
This method is quicker in the long run, and you will face less interest charges because you are tacklikg the highest interest rates first.
However this method can be found a little less motivating as you are usually starting with a more daunting debt.
Find what works for you. You do not need to stick with the same method the whole time.
Say you have a list of 7 different loans, perhaps starting witht he snowball method to get rid of a few smaller charges will help to motivate you (and not feel too overwhelmed). Once you have cleared some debts , you can then use that extra cash you freed up to switch over to the avalanche method and tackle the highest interest rate next.
Where to find the money to pay down your debt:
- Bonuses
- Ask for a Raise
- Birthday money
- Cut back expenses (groceries, cable, retail therapy)
- Side hustle/ 2nd job
Middle Ground – Finding Balance
You need to be able to have balance when it comes to your finances.
If you want to reach your financial goals you will need to have some money saved.
Want to buy a house?
Plan to get married or have a child?
Worried about medical expenses in the future?
You will need to have money put aside.
Debt repayment can take years, you do not need to wait until every last penny of debt is paid off.
If there is debt that is causing you daily stress, it needs to be addressed and taken care of.
If you are worried about not having any money in savings, then make that a priority.
Find what works for you, you can always tweak it down the road just get started with a plan today.
How to Divide and Conquer
The ideal scenario is to pay down your debt while still squirelling some money away.
Yes your funds may be limited, but you need to build the habit of saving now.
Even if you are just saving spare change. It will add up, and when you free up some debt you will have more money to put into savings.
An example of what this could look like is:
You pay for your essentials like shelter, food and water.
The remaining money you put 90% towards debt repayment and 10% towards savings.
(These percentages can be adjusted according to what works for your budget)
$300
90% towards debt
$300 x 0.90 = $270
10% towards savings
300 – 270 = $30
Now that you have some insight on how to pay down debt and save money at the same time, let me know what has been working for you?
How much do you put towards savings?
Let me know in the comments down below!
*Just a friendly reminder I am not a financial advisor. The above should be taken with a grain of salt and you should do what’s best for your budget and family. Feel free to ask a professional. 🙂
You got this!
Connie xoxo
