Money Smarts Blog

Paying off debt is a concern for most Americans of all ages. A Google search on the topic produces over 257,000,000 results, and if you’re ready to forge a plan to pay off or reduce your debt, knowing where to begin can be overwhelming.

I’ve been there. I once racked up $7,000 in credit card debt and I felt like I’d never pay down the total. Luckily, I was able to pay off my credit card and stay out of debt (aside from mortgage and student loans. Let’s be honest— my student loan debt is killing me!) and build a healthy savings account.

There are a lot of ways to pay off and/or reduce your debt. So many in fact, it would take pages to explain them all. I will, however, provide some simple ways to start paying off your debt and begin saving some of your hard-earned money. Hopefully with this knowledge you can start the New Year with a solid plan for your financial future.

Regardless of how you go about paying off your debt, remember, it’s not going to happen overnight. It’s going to take time and diligence, but it is possible to get out of debt and start saving, so get started today (right after you read this post).

The Case for Paying Off Debt While Saving

Many people think it’s best to strictly focus on paying down debt rather than paying off debt and saving at the same time. However, the importance of saving while getting rid of debt is often overlooked. Latoya Scott, a financial educator says, “If you’re in debt, saving money shouldn’t be optional because, in the event of an emergency, the last thing you want to do is go further into debt.”

Debt can be a vicious cycle. You start with a small amount of debt, acquire more because of medical bills, schooling, or emergency situations, then (because of low monthly income and little to no savings) because you’re forced to use credit, your debt grows and becomes progressively harder to manage. I don’t want you to get into this cycle, but if you’re already in it, saving as you go will eventually get you out of it.

How to save while paying off debt

Step 1: The first thing you need to do is make a monthly budget. Identify your total income and subtract all your monthly expenses, including the minimum payment for the debt you want to pay off. This should provide a clear picture of the amount of “extra” money you’ll have each month. The “extra” money should then be split between adding to your savings and paying extra on your debt. 

Be realistic. Make sure the amount you determine to be split between savings and debt, will really be spent accordingly. It’s important to include variable costs, things that aren’t bills or monthly payments, such as going out to eat, getting coffee, clothes, etc. Allow the smallest portion of your “extra” money to cover a bit of these things from time to time. We all need a little fun, right? Eliminating as many of these extras as possible from your monthly budget is ideal, but remember, be realistic.

Many people don’t account for the large amount of variable costs they have each month (guilty!) and those costs can add up quickly. If you can’t give up your monthly massage, make sure to include it in your budget as a monthly expense. Remember, while you’re trying to pay down debt, eliminating unnecessary variable costs will help you become debt-free faster.

Step 2: Many people advocate for having an emergency savings account which includes one to six months of your monthly expenses. Figure out how many months of expenses you’d like to have set aside in case of emergency before you move onto the next step.

I decided to save three months of expenses while paying down debt. I actually paid off my non-mortgage/car/student loan debt a few years ago, but I’m still working on my savings goal. When emergencies or unexpected expenses pop up, I use my savings account to cover them. This pushes my savings goal back a bit each time, but at least I’m not acquiring new debt!

Step 3: Decide how you’d like to tackle your debt: snowball or avalanche style.

The snowball strategy means paying off your smallest loan or credit card balance first, no matter what the interest rate is, and then tackling your next smallest debt until you’re debt-free. With each loan or credit card you pay off, you gain momentum to pay off the next debt quicker since you have extra income (from paying off the previous debt) to put towards it.

Using the avalanche strategy means paying off your highest interest rate debt first, then work your way down from highest interest rate to lowest. This strategy will save you money in the long run because you won’t pay as much interest over time.

Both strategies are proven to help pay down debt—you just need to decide which one is most comfortable for you. I preferred the snowball strategy because I felt more momentum each time I paid off a loan and I needed to feel like I was making a dent in my total debt. You may prefer to get your high interest debt out of the way first. Either option will get you closer to your financial goals, so choose what works for you!

Step 4: Do not pass on free money! If you have coverage under a HSA-qualified “high-deductible health plan”, you can contribute money which can be used for deductibles and other medical expenses, helping you avoid healthcare related debt. Plus, there are some tax benefits from HSAs so see if your employer offers any of these.

Also ask your employer about the retirement plans they offer. Employers will often match employee contributions up to a certain amount of your salary, so it’s free money. This won’t help you pay off debt, but it will help with your long-term savings goals. I know it’s hard to think about retirement when you’re focused on making it month to month, but if your employer offers a retirement plan match, there’s no reason to not contribute a little bit each month.

It’s a lot to absorb I know, but if I had to boil it down to one thing it’s this: find a balance between paying off debt and saving. With 81.5% of Millennials, 79.9% of Gen Xers, and 80.9% of Baby Boomers in debt, you’re not alone. You don’t have to choose between paying off debt and building a savings account. You can work on both financial goals at the same time and find more peace of mind regarding your finances.