You have oodles of debt that you want gone. But you also have other important financial goals, like saving money, that need your attention. These competing priorities can make you feel like you’re trapped in a chicken or the egg conundrum. If you pay down your credit card debt, you’ll have more wiggle room in your budget and can save that extra cash. But, if you save more money, you won’t have to whip out your credit card next time an unplanned expense pops up. So do you pay off debt or save? The short answer is: porque no los dos?
Here’s your plan of attack to slay debt and pad your bank account:
Divide and Conquer
To work on both goals simultaneously, you’ll have to split your available resources between them. But, you need a clear plan to ensure that you allocate your dollars in the most effective way.
To get started, prioritize your debts and savings goals, keeping these things in mind:
- High-interest debt will sink you. If you only make the minimum payments on your credit cards, you’ll be in the hole for years and pay potentially thousands extra in interest. Get rid of this debt first.
- Lower interest debt isn’t as urgent. While you definitely want to pay off all of your obligations, “good” debt like student loans and your mortgage do less damage to your financial health.
- Paying extra on installment loans doesn’t help your budget now. If you sock extra cash at your mortgage or student loans, you’ll reduce the total time you’re paying on them. But — it doesn’t change your required monthly payment amount.
- An emergency fund will save you in a pinch. A cash reserve will keep you from going further in the hole when something breaks or you lose your job.
- Start saving for time-sensitive goals ASAP. The holidays, your sister’s destination wedding, and your car registration renewal are all known events. Squirrel away a little bit here and there in the months leading up, and you’ll pay for them in cash with ease.
- Don’t ignore retirement. It may seem like a million years away, but delaying saving for retirement will have long term negative effects. You’ll miss out on the compounding interest that actually works in your favor. If you can afford it, contribute at least enough to your retirement account to get your employer’s full match.
Choose the Right Mix
Once you’ve got your priorities in order, you need to divvy up your funds in a way that makes the most sense for you. For example, from your discretionary income, you could put 6% into retirement, 50% toward your credit card debt, and 44% toward your savings goals. As you pay off debt and your goals are completed or change, be sure to adjust your mix accordingly.
Remember: While there are some good guiding rules of thumb, how you manage your money is up to you. Personal finance is personal!
Find the Dollars
To make faster progress toward your financial goals, try freeing up more of your existing resources, increasing your cash flow, or both. Here are some steps you can take today:
- Review your spending. Is there anything you can scale back on or nix?
- Negotiate your bills. You may be able to get a lower rate on things like car insurance or cell phone service just by calling your provider.
- Buy smarter. It doesn’t matter if you’re getting groceries, clothing, or shopping online, there are countless ways to get what you need and come in under budget.
- Earn more dough. Consider picking up extra shifts at work, getting a second job, taking on freelance clients, or selling some of your unwanted stuff.
Remember: While it’s tempting, be sure to use your budget wins and side income for your debt pay off and savings goals, not for brunch and a new pair of shoes.
It can be overwhelming to juggle multiple, seemingly-competing financial goals. But if you proactively map out what you need your money to do, you can strike a balance that allows you to live your best life.