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Last Updated on April 28, 2020
To save or to focus on repaying debt? This is an all too common question being asked recently. At a time when households are carrying almost $40,000 in debt and workers are becoming increasingly worried about running out of funds in retirement, combining savings and debt repayment may be the last thing on your mind. It is often thought that one has to choose between the two: repay debt or save for the future. One in four people has little or no emergency savings. But why can’t you achieve both? Whether it is saving to get on the property ladder or for those unexpected incidents that tend to pop up, it is possible to save while you’re repaying debt. The key to this lies in discipline and striking the perfect balance for you and your family. Check out a few suggestions that can help you bump up your personal savings balance whilst staying on track in your debt journey.
Leverage Your Options
The first trick to building your savings whilst repaying your debt is to find your equilibrium. Credit cards are notorious for high interest rates, and therefore can rack up a pretty amount in interest each month. With this reasoning in mind, it is always advisable to measure your savings rate against your debt interest rate. Will it cost you more than it earns you every month? If it does, then make payment of those debts a priority when apportioning funds for savings and debts. Leftover money can then be used to meet your minimum payments on other debts and deposit into your savings. Keep in mind that personal savings do not have to necessarily equate to cash in a bank; some may opt to invest into alternative options such as metals, cryptocurrency or bonds to earn interest until needed.
High-Interest Debts Trump Savings
Following on from the first point, high-interest debt is always tricky and should be addressed first. This means that when it comes to the balance between saving and high-interest debt, most times the debt wins and more of your funds should be paid towards the debt. The reasoning behind this is simple: higher interest rates mean higher fees as long as the debt is carried. Therefore, paying down the debt as soon as possible will help to relieve the financial pressure and make your money go further. Otherwise, minimum payments towards these debts may only be servicing your interest charges (or even less) and keep you in the debt circle for longer. You can also consider options such as refinancing your loans in a bid to secure a lower, more uniformed interest rate across your debts. Refinancing and consolidation are two savvy approaches to settling personal borrowings faster and on more favorable terms.
Make A Swap
The final point aligns with your lifestyle and budgeting skills. It is well known that getting comfortable with budgeting is the most important step to getting your spending under control. If you are to put money away whilst making debt repayments each month; you need to be savvy with your money (and your spending by extension). Simple swaps in your lifestyle can save you money which can then be allocated to your savings. This way, your debt repayments are not affected. In fact, you have just carved out more disposable income for yourself by being financially smart.
One place you can do this is in the kitchen. Americans spend over $4,200 each year on dining out, whilst uneaten food costs a family of four $1,500 each year. Meal preparation and smart shopping can help to reduce this. Swapping branded products for a generic supermarket or own brand substitute is also a great way to cut your grocery bills. Most times they are made with the same ingredients and cost a good chunk less. Elsewhere, swap gym memberships for outdoor activities and exercises in the parks. They cost nothing, and using them removes or reduces your monthly spend. Another option would be to earn more income, which can be done with a side job, or even being adventurous and starting your own business from home.
Regardless of how you do it, saving while repaying debt is possible. It’s also a smart thing to do. Focusing on debt can leave you unprepared for emergencies and, should they occur, leave you without a financial cushion and turning to debt yet again.