Learn and Plan | How you can balance paying off debt and saving money
A mother looking at her finances with her young daughter sitting next to her

How you can balance paying off debt and saving money

Feb 6, 2024, 3:01:25 PM | Reading Time: 4 minutes

Paying off debt and saving for the future are two important financial goals, but sometimes, it can be challenging to choose which one to make a priority. Thankfully, it can be possible to save money and get rid of debt simultaneously by adopting good money management habits. Here are several tips for balancing these financial responsibilities.

Woman meditating

Review and reformat your budget

Using a budget is key to begin putting money toward paying down debt and saving for the future. Start by exploring how much monthly income you earn and what this money is spent on each month. Tally up general expenses and how much debts are costing every month, and rank them from the highest interest rate to the lowest. With a better understanding of income and expenses, it can be easier to pinpoint which items to cut and free up more money to put toward these goals.

To save more money and successfully pay down debt, there may need to be some sacrifices. Can any streaming services be cut from the budget? Can more nights be spent cooking at home instead of eating at restaurants? These are the kinds of questions to ask as you comb through a budget and search for line items that can be reallocated for debt payments and retirement savings. Using a budget worksheet or tracking expenses with help from a budgeting app can make this process easier.

Set hard limits for expenses

Once a budget is set, it’s important to stick to it and establish firm limits for any item that isn’t a necessity. Variable expenses like entertainment, gifts, and restaurant dining could be reined in to ensure there are funds for your specific financial goals. One method to keep spending in check is setting up a checking account for variable expenses only. This can help prevent going over or instantly borrowing funds from other line items. Once the money is gone in the variable expense account, no further spending should be until the following month.

Make a debt reduction plan

Now, with a budget you can stick to, it’s time to start chipping away at outstanding debt. With a list of debts from the highest interest rate to the lowest, a helpful strategy is to pay off the highest-interest loans and credit cards first because they cost the most in borrowing costs. To make headway, pay more than the minimum amount each month. Once the credit card is paid off, the monthly amount used to pay it off can be put toward the next highest debt. If a small balance is left on a debt with a lower interest, you can make an exception to the top-down rule. Eliminating a debt, even a small one, can offer a significant confidence boost and the motivation to keep going.

Automate your money

Once you know how much money you want to allocate for debt costs and toward savings, consider automating payments on loans and credit card payments. It can also be a good idea to set up a direct deposit to a savings account or automate 401(k) plan contributions so a month is never missed. This process can help eliminate the steps that manual payments require, so you won’t have to remember to set up a bill payment.

Earn extra cash

Tightening a budget may feel too restrictive. To give yourself a little breathing room, consider taking on a part-time job or starting a side hustle for extra cash. Whether that’s driving passengers, freelancing online, or selling stuff you no longer need, there may be various ways to earn more money toward your goals.

Talk to a financial professional

If you need help to balance paying off debt and building your savings, finding a financial professional can provide expert guidance and recommended strategies for maximizing your assets and reducing debt quickly. Together, you can explore different solutions like annuities and life insurance, update your financial plan to meet your short- and long-term goals and create a roadmap toward a more secure financial future.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.