Debt Down, Savings Up

When you want to pay off debt fast, that impulse often means depleting your savings. So how do you pay off debt AND save money?

For starters, your debt is likely costing you more money every month than your savings is earning. Looking simply at the highest net impact of your dollar, it would make sense to use extra income to pay off debt rather than save the money.

The trick is to avoid allowing this strategy to result in more debt. Think about it. If you’re taking all your spare dollars and diverting them to your credit card or other loans, completely neglecting your savings account, what will you do when an emergency comes along for things like car repairs, vet bills, and the like?

Life happens, and since you don’t have a savings account, you’ll probably have to slap these expenses onto the credit card you’ve been working so hard to pay off.

Here’s how to break the cycle:

1. Put away the credit cards and stop adding to your debt.

2. Set a goal for your savings account that you’re comfortable would cover most emergencies – like $500.

3. Pay at least the minimum payments on your loans while you build your savings account to $500.

4. Then, dedicate more money to paying down debt.

5. If an emergency comes along that takes your savings below $500, switch back to paying the minimum on debt and put extra money into savings to build back up.

6. Once savings is steady at $500 and you feel you’ve gotten your debt under control, start increasing your savings. Most personal finance experts say your emergency savings should be able to cover three to six months of living expenses.

Don’t stop contributing to your retirement savings or dip into your retirement savings unless it’s truly an emergency – your future self will thank you.

With patience and some baby steps, you’ll soon have your finances under control and find yourself resting on a comfortable nest egg.

Copyright 2017 Credit Union National Association Inc.

 

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