How Do You Save and Pay Off Debt at the Same Time?

How Do You Save and Pay Off Debt at the Same Time?

If you’ve decided to start working toward a more secure financial future, you may have realized there are a number of steps to take and it can feel overwhelming.

You should save for retirement, emergencies, education expenses, other potential large purchases like a home or vehicle, and more. And, if you currently owe money, you should focus on paying off your debt. 

So how do you know whether you should pay off debt or save funds for the future? How do you go about doing both? Here are the steps you should take, and tips for doing so, to ensure you meet your future financial goals and pay off your debt. 

What is debt?

Debt is any money you owe, such as credit card bills, car loans, mortgage or home equity loans, and student loans. If you continue borrowing money without paying down or off your balance, high interest rates can continue to increase your debt and the more time you take to pay it off, the more money you’ll owe. 

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There are two types of debt:

■ Revolving debt is the type of debt you have from credit cards, where you carry the amount you haven’t paid from month to month. Interest rates can change, but you can borrow as much as your credit limit allows. 

■ Installment debt is the type of debt from auto loans, mortgages, etc. Typically, the interest rate, payments and amount borrowed are fixed. 

Best ways to pay off debt

There are essentially seven steps to paying off debt and saving for the future. 

1. Start an emergency fund

If you don’t already have at least $1,000 in savings, this is your first step even if you have debt. This is because while you’re paying off your debt, if something happens and you need emergency funds, you have them and don’t have to rack up more debt to pay for the emergency. Start by cutting back your spending or selling things you don’t need.

If you already have at least $1,000 in the bank, skip to Step 2. 

2. Pay off most of your debt

Once you have your emergency fund started, it’s time to pay off all of your debt except for your mortgage.

There are a few ways you can do this:

■ The snowball method pays off the minimum amount of each account, and then uses whatever money is left, paying off the account with the smallest overall balance. Once paid off, you move to the next smallest account, and so on. Because the smallest debt is paid, you can roll the payment you were making on that into the next-smallest payment. 

While it’s difficult to contribute to savings with this method, that’s ok. It’s more about the momentum and focus, since it encourages small wins in the process.

■ The avalanche method focuses on paying the minimum amount of each account, and then using whatever is left to pay off your debt starting with the account with the highest interest rate. Once that account is paid off, move on to the next one. 

For each account you pay fully off, you can put money toward the next account and the highest interest rates are eliminated first. However, it can seem like you’re not making any progress with this method, which can make it difficult to stick to. 

■ Balance transfers help you consolidate debt and decrease your interest rates. With this method, you move credit card balances to a new card with a lower interest rate and use the new card to pay off the owed balance of your old card. This may help you save money on interest and consolidate payments, but the lower interest rate on the new card may only last for a limited time.

■ Debt consolidation loans are low-interest personal loan taken out to pay off high-interest debt. This helps you get out of debt faster, so you only have the one loan to pay off. However, it’s possible you won’t get a better rate on your new loan than your current debt.

3. Save 3-6 months of expenses

Now that you’re debt-free, you should grow your emergency fund. Experts recommend having at least 3-6 months of expenses saved in case of an emergency. Once you have this buffer in place, you can focus on investing and saving because you won’t have to worry about not being prepared for expenses that come your way. 

4. Invest in retirement

Next, experts recommend investing at least 15% of your gross household income into retirement accounts. You can start with your employer’s 401(k) if you have one, and invest up to their match. 

Then, consider contributing to a Roth IRA and max out the contributions you can make to that fund. If you have more and are able to invest a higher percentage, do so. 

5. Start an education fund

If you have children or are planning them in your future, your next step is to start saving for their education. This can help protect you from having to co-sign or take on additional debt for their student loans, and it can also help set them up for success because they may not have to take out loans at all. Student loans can be a big financial burden, so easing that burden by saving early can be beneficial. 

6. Pay off your home

Now that you’ve contributed to savings and your 401(k), and most of your debt is paid off, it’s time to tackle your mortgage payment. Depending on your interest rate, you may be paying off significantly more than your original mortgage amount at the end of the day. That’s why it’s important to pay off your home early. Start by making payments larger than the minimum, or making large payments when you’re able. 

7. Continue to build wealth

Once you’re completely debt-free and investments are earning for retirement, continue to build your wealth. Put most of your earnings in savings, and be cognizant of how much you’re spending and on what. 

Caitlyn Callahan 

Caitlyn is a freelance writer from the Cincinnati area with clients ranging from digital marketing agencies, insurance/finance companies, and healthcare organizations to travel and technology blogs. She loves reading, traveling, and camping—and hanging with her dogs Coco and Hamilton. 

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