Americans continue to struggle to pay down debt and save money.
According to a Bankrate survey, 24% of Americans have more credit card debt than they do savings. Another 16% don’t have credit card debt but have no savings, either. Add these together and a total of 40% of Americans surveyed are at risk in an financial emergency. Just one car accident, medical emergency, or other financial trouble can mean disaster, leading to more debt, foreclosure, or bankruptcy.
If you’ve found yourself with more debt than savings, take action to pay down debt and save money using these steps as a guide.
Save an emergency fund first
The first step to paying off debt actually involves saving money. The reason: having zero savings is risky and can lead to taking on debt if cash isn’t available in an emergency.
Save an emergency fund if you don’t already have one. An emergency fund is considered savings, although it’s restricted to use for true emergencies and not vacations, shopping, or other unplanned-for expenses.
Shoot for a fund of at least $1,000 to start, and increasing it to at least three months of living expenses over time. The idea is to have a cushion in extreme situations so you’re not relying on credit cards when you unexpectedly need money.
Change your priorities
The Bankrate survey reveals that a similar percent of Americans at all different income levels have the same problem of more debt than savings.
While 30% of those making $30,000-$49,900 have more debt than savings, so do 23% who make $75,000 or more. This suggests the core problem isn’t just an across-the-board lack of income. For some, it’s more likely an issue of prioritizing where money goes.
Once your emergency savings are secure, take a hard look at your budget. You may be living paycheck to paycheck, but should you be? Have you already exhausted all options for cutting down expenses and using the cash for paying off debt or saving?
Instead of saving whatever’s left over, save first and then spend on discretionary expenses. Set aside a certain percentage of your income, like 10%, to pay towards debt or save in a separate account.
Consider your short- and long-term financial goals, too. If you’re looking to buy a house, you’ll need savings for a down payment. If you’re stacked with debt, your debt-to-income ratio, which is used for your mortgage application, won’t look so great either.
Aggressively pay down debt
For most, targeting debt before stacking up on savings is the best strategy. The reason: interest on debt typically costs more than interest rates or returns from saving and investing money.
This is almost always true with credit card debt. With interest rates exceeding 20% APR in some case, this dwarfs interest rates paid on checking accounts, which may be only 1-2%.
When paying off debt, be strategic about interest rates to save the most money. Start paying off accounts with the highest rates first and work your way down. Or if you prefer the debt snowball method, which costs more but can be more motivating, get to work on the lowest balances first.
While saving money might not be the preferred financial approach before paying off debt, go with the option that lowers your stress levels and mentally helps accomplish goals faster.
Pay lower interest rates
Interest rates aren’t set in stone. In some cases, you may be able to refinance debt to save money.
Focus on high-interest debt, like credit cards. Can you transfer balances to a card with low or no-interest and pay off the balance before rates go up? If so, you’ll be able to pay off more debt faster.
Others have used peer-to-peer lending to pay lower rates by refinancing credit card balances and auto loans with a loan issued by other consumers.
Avoid adding debt
If you’re trying to pay down debt, adding more makes little sense.
Put down the credit cards and forget about financing a new car while you’re battling debt. Wait until after you’ve surpassed debt with savings to considering borrowing money again. It’s simply easier to stay on track when your balances only move in one direction: down.
Turn debt payments into savings deposits
Once you’ve paid off your debt, you’ll still need to work on increasing your savings, which might still be close to zero at this point.
The easiest way to put more into savings: Take anything you were paying towards debt and save the full amount. If you’ve been able to live without this money while paying bills, why not stay on the same track? Just treat your savings account like a bill you need pay, and you might never notice this money missing in your life.
What is your best strategy to pay down debt and save money?