Balancing Debt Repayment with Savings
June 25, 2024
Managing finances can often feel like a juggling act, especially when balancing debt repayment with saving for retirement and emergencies. Before creating a plan, you need to understand your current financial situation. Get started by gathering all your financial information, including your current debts, income, expenses, and current savings like 401(k) accounts and investments.
Once you have compiled your financial information, it’s important to establish a budget, which is essential for managing your debts and savings effectively. When designing your budget, you should pay yourself first by setting aside savings. Typically, this is a percentage of your pay that you are comfortable tucking away and not needing for other expenses. The amount can be divided between a retirement account like a 401(k) and a savings account. The most successful savings strategy is to automate it. Have defined amounts deposited into your savings accounts from your paycheck or automatically drawn from your checking. This will ensure that your savings goals will be met!
When considering saving, it’s important to set yourself up for success by not over or underestimating a comfortable amount. The first thing to build is an emergency fund that can cover three months of necessities. Once you have that, you can keep growing your savings towards a six-month emergency fund or for other life expenses like a new car or vacation; however, start putting away a portion of your savings into a retirement investment account. This is so important to start early and continue to grow over time since the largest growth will come from compounding interest.
Next, prioritize your necessities to cover your living expenses, utilities, groceries, and transportation. During your budgeting process, also use the time to review your spending habits and identify areas where you can cut back. This might include dining out less, canceling unused subscriptions, or finding cheaper alternatives for certain expenses. With any savings you can put the extra towards paying down your debts.
When you are looking at the money you have remaining after savings and expenses are allocated, hopefully you have enough to meet all minimum payments, and some left over. With anything left over, you should prioritize your highest-interest debts. These are often credit cards or private student loans. Buy-now-pay-later loans can also have high interest rates after the introductory repayment period. Once you pay off the loan with the highest interest rate, you would move on to the next highest and so forth.
An additional option for debt repayment is a debt consolidation loan. Typically, these programs offer a lower interest rate than the average rate of your combined loans with the goal to save you money over the repayment of all the debt. This is helpful for anyone with trouble managing and prioritizing paying down debts. Affinity offers members credit resources1 to determine the best path forward.
Regularly review your financial situation and adjust your budget as needed. Celebrate small victories, like paying off a debt or reaching a savings milestone, to stay motivated. Balancing debt repayment with saving for retirement and emergencies is challenging but achievable. By assessing your financial situation, creating a budget, prioritizing high-interest debt, and consistently saving, you can work towards financial stability and peace of mind. Remember, the key is discipline and consistency—every little bit helps on your journey to financial freedom.
This information is for informational purposes only, is intended to provide general guidance, and does not constitute legal, tax, or financial advice. Each person's circumstances are different and may not apply to the specific information provided. You should seek the advice of a financial professional, tax consultant, and/or legal counsel to discuss your specific needs before making any financial or other commitments regarding the matters related to your condition.
1 Retrieved from: https://www.affinityfcu.com/financial-wellbeing/credit-counseling