Choosing whether to save or pay off debts can be a difficult decision. Saving money for a rainy day or retirement seems like a top priority, but will your debts linger on for years to come?
Managing debt and maintaining savings is tailored to each individual, and different strategies can be implemented in helping to achieve your goals. Here are three tips on how to maintain a balance between paying down debt and saving.
Learn to Budget
The first step to managing your finances better is learning how to budget. Knowing your expenditure can seem like a scary thought at first, but creating a budget helps to prioritize financial obligations.
Start with your monthly income after tax, and then list your expenses. According to Certified Financial Planner, Jeff Rose, it’s best to separate your expenses into three categories.
- Fixed: rent and debt repayments (these expenses are necessities).
- Variable: groceries, travel expenses and utility bills (expenses that can be adjusted).
- Optional: expenses that aren’t necessary, such as going to the movies, out to restaurants or on vacation (expenses that you can live without).
Breaking down expenses into categories helps identify optional expenses. By reducing them, you’re saving money.
Gather information and find out the total amount owed, the interest charges, and the terms of the loans like how long you have to pay.
Student loan refinancing can be one of the most effective ways to lower your monthly outgoings and help make your finances more manageable. Refinancing is essentially applying for a private loan at a much lower interest rate, and that could potentially save you thousands of dollars. Refinancing companies tend to be strict in terms of eligibility. Most lenders will want to see a steady stream of income, ability to manage finances, and good credit history.
Paying Down Debt First
Now that you have an idea of where you can free up some cash, it’s time to prioritize paying down larger debts first and paying the minimum towards debts with lower interest rates.
Donald Hammond, MBA, CFP, and executive vice president at Maritime Financial Group suggests:
“List your debt from the highest interest rate to the lowest. Pay off the highest-interest cards and loans first, paying more than the minimum each month. Continue to at least make minimum payments on the rest. Work your way down until everything is paid off.”
With this method, Hammond suggests to get more aggressive on larger debts with higher interest rates. For example, paying $400 towards a credit card with an interest rate of 17 percent is going to be more effective than paying down a credit card with an interest rate of 7 percent.
You Can Do It
Saving for the future and paying down debt doesn’t have to be mutually exclusive. Establish a budget, and you’ll get a clear picture of which outgoings can be tweaked to save money. The methods listed above are a strategy to chip away at your debts, maintain savings, and bring you one step closer to becoming debt-free.