How to Get Out of Debt | Pay Off Debt or Save?
Paying off debt and saving money are both important. But how can you figure out which one to focus on first? The best option for you depends on your unique financial situation and various other factors. Here’s how to find out if you should prioritize paying off your debt or saving money.
When You Should Pay Off Debt Before Saving Money
In some instances, it makes more sense to pay off debt than to save money. If you have high interest debt from credit cards or loans, for example, focus on paying it off first. By doing so, you may be able to save thousands or even tens of thousands of dollars in interest.
You may also want to pay off debt before you save money if you’re struggling to cover your everyday expenses like your mortgage, rent, utilities, and groceries. With less debt or even no debt, you’ll be less likely to fall short on cash every month.
How to Get Out Of Debt Fast
Fortunately, there are a number of ways you can pay off your debt and keep more of your hard-earned money in your pocket. Here are some tips to help you out.
Calculate How Much You Owe
Before you begin your debt payoff journey, make a list of all your debts. These may include credit card debt, payday loan debt, car loan debt, and more. Then, add them together so you know exactly how much you owe in total.
Pay the Highest-Interest Debt First
Make minimum payments on all your debts and put extra money toward your debt, starting with the highest interest rate. Once you’ve paid down your highest-interest debt, move on to the second highest-interest debt until you’re completely debt-free.
Get a Balance Transfer Credit Card
If you’re overwhelmed with credit card debt, a balance transfer credit card can be a good option. This option involves transferring all of your high-interest credit card balances to a new credit card with a low or 0% interest rate. With this strategy, you’ll find the debt payoff process to be more manageable and save money on interest.
Add to Your Income
The more money you have, the more you’ll be able to contribute toward your debt. To increase your income, you may want to get a part-time job, pick up a side hustle, or sell unwanted or unused items online. Get creative and think about what products or services you can offer to add extra cash to your bank account and pay off debt faster.
Strategies to Get Out of Debt Fast
Here are some common debt repayment strategies that can help you get out of debt faster:
Debt Snowball Method
The debt snowball method involves paying off your debt with the smallest balance and then working your way up to the largest balance until all your debts are paid. Start by making a list of all your outstanding debts, organized from the lowest balance to the highest. Then, designate as much money as you can each month toward the smallest debt, while making minimum payments on all other debts. Once you’ve paid off the first debt, continue the process until you’re debt-free.
Debt Avalanche Method
With the debt avalanche method, you’ll focus on paying off the debt with the highest interest rate first while making minimum payments on all other debts. Then, you’ll pay off the debt with the next highest interest rate, and keep going until you repay all your debts. This method can help you save more money in interest payments.
When You Should Save Before Getting Out Of Debt
There are some instances when it’s a good idea to save money before paying off your debt. Saving money can be a better option if you’d like to be well-prepared for unexpected expenses. It may also help you achieve a long-term financial goal, like buying a house or paying for college.
How to Save Money
Here are some of the best ways that you can start saving money.
Create a Budget
A budget is a spending plan based on your income and expenses. If you create a budget (and stick to it), you’ll find it easier to save money. Consider the 50/30/20 budget in which you spend about 50% of your after-tax income on necessities, no more than 30% on wants, and at least 20% on savings.
Cut Back on Non-Essential Spending
Take a close look at where you spend money every month. Chances are you’ll find that some of your spending is non-essential. Reduce or even eliminate non-essential expenses such as a gym membership you don’t use, restaurant meals, or daily trips to the coffee shop. By doing so, you’ll have more money to save.
Track Your Expenses
Use a spreadsheet or piece of paper to track your expenses. You may want to track by categories like housing, utilities, gas, food, and entertainment. By keeping tabs on your expenses, you can stick to your budget, uncover spending issues, and ultimately meet your savings goals. Here’s a tracker to get you started.
Set Savings Goals
Think about why you want to save money. Maybe you’d like to move from an apartment to a house in the next few years, or perhaps you hope to retire by the time you’re 60 or 65.
Set your long-term savings goals, jot them down, and keep them in a place where you’ll always see them. This way you can stay motivated to continue saving your money.
How Much Money Should I Save Each Month?
A general rule of thumb is to save at least 20% of your income each month if you can. Using the 50/30/20 rule can help you reach this monthly savings goal. But if you can’t save 20%, don’t get discouraged. Any amount you contribute to your savings can help you in the long run. Commit to saving an amount each month that works for your budget and long-term financial goals.
What To Consider When Deciding Whether To Save Money Or Pay Off Debt
Here are some factors you should consider when deciding whether to save money or pay off your debt:
Your emergency savings
An emergency fund should be your top priority, as it can ensure you’re prepared in the event of a car repair, medical bill, or another unexpected expense. An ideal emergency fund should cover three to six months’ worth of expenses, but whatever amount of money you can save helps. It’s a good idea to keep your emergency fund in a high-yield savings account so you can easily access it whenever you need to.
Your Job Situation
If you don’t have a secure job or are unemployed, you may want to focus on putting money into an emergency savings fund before paying off debt. This can help you be prepared to cover expenses if you find yourself in a financial bind.
The Types Of Debt You Have
If you have outstanding debt with high interest rates, like pawnshop loans, you should prioritize paying these debts off first. By getting rid of high-interest debts, you’ll end up not having to pay as much in the long run and can put more money toward your savings.
How to Get Money Fast
If you find yourself in a situation where you need money fast, Advance America loans can help you. We offer a number of loan options such as payday loans and installment loans to help you meet your short-term financial needs. Upon approval, you can receive the funds within in 24 hours. Learn more about the loans we offer, and how you can get started on an application today.