Do you have student loan debt? Credit card debt? Medical debt? Then you probably know just how difficult it is to balance paying off debt and saving.
Let’s be honest – saving is probably the last thing on your mind if you’re in this situation. Debt can be a huge money hog! However, saving does have its place despite the debt you find yourself in. It’s all about priorities.
Create a debt payoff plan
The first place to start is creating a debt payoff plan. Just like you need a plan to save, you need a plan to pay off your debt. This plan can change, but you need to give yourself some sort of direction to follow.
There are typically two debt payoff methods people use: the debt snowball and the debt avalanche. The snowball method involves focusing on the debts with the highest balance first, while the avalanche method involves focusing on the debts with the highest interest rate first.
You can combine the two methods and kill off whatever debt presents the biggest problem, too. There’s really no “right” or “wrong” way to pay off debt as long as your balances are going down.
Once you’ve decided on a method to use, you’ll want to figure out how much extra you can afford to put toward your debt payments to accelerate your debt-free date.
Prioritize one way or another
There are some people who believe that debt is an emergency no matter which way you cut it. These people advocate for prioritizing paying off your debt at all costs.
However, saving money still has its place in your financial plan, especially if you’re in credit card debt. The reason being is that if an emergency occurs, you should have a cash buffer in place to pay for it. You want to do everything you can to avoid an increase in your credit card balance.
It’s up to you on how you prioritize this. You could use your extra money to make larger payments toward debt, or you could save the extra money you have and increase your emergency fund, circling back to extra debt payments after that’s built.
Again, there’s no “right” or “wrong” method here. Personal finance is personal for a reason. If you sleep better at night knowing you have an emergency fund to cover life’s curveballs, then prioritize saving.
If your debt is causing you nightmares, then prioritize paying extra so you can begin saving once it’s paid off.
To be clear: even if you focus on saving, you should still pay the minimums on your debt. You shouldn’t ever stop paying that!
Figure in earning more and cutting back
When dealing with the question of competing financial priorities, the best solution to managing the situation is a combination of earning more and cutting back.
If you haven’t found ways to save in your everyday life just yet, then you’ll want to focus on reducing your expenses first. Spending according to your values is one of the easiest and painless ways to do that.
Earning more isn’t easy, but it’s absolutely necessary. There are limits to how much you can cut back, but earning more is unlimited. It’s also the best way to accelerate progress on your financial goals.
Focus on your skills and what you can offer to the world. Do you enjoy babysitting, dog walking, drawing, writing or entertaining people? Millennials have all sorts of different side hustles they use to earn money, and you can do it as well with some careful thinking.
Finding the balance between paying off debt and saving
As with most money-related things, finding the balance can be difficult, but it’s not impossible. Ask yourself which is more important to you right now: saving or paying off debt?
To what lengths are you willing to go to accomplish these goals? Are you okay with reducing your expenses and earning more? If not, then be realistic about what you can accomplish in your current situation.
At the end of the day, do what’s right for you. No one is in the same exact financial situation, so there’s no one-size-fits-all solution. Evaluate your options and choose the method that will help you get to where you want to go.