Invariably at some point of time or the other we come in situations which we wanted to avoid. Such are debts. You already are in one is proven by your presence here.
Now saving money while paying off debt seems like a contradiction in itself. How can one save money when he is in debt on the other hand? But people have done it. This is the only positive about the whole debt ridden situation.
Be it your credit card loan, student loan or personal loan, there are ways to save money and pay off the debt obligations simultaneously.
Higher interest rate method
In this method, the loan with the highest interest rate is tackled first. Then the next debt with the highest interest rate is the focus. The advantage of going by this approach is that you get over the burden of paying off the costliest debt first, which is a huge relief in itself.
The opposite to the higher interest rate method is the snowball method. As the name suggests, it refers to beginning the payment of your debts from the least expensive one to the costly one. This is beneficial if you have many small debts and the progress also looks faster!
Ultimately, it is up to you to decide which method will work best for your financial situation. The CFPB offers a fantastic debt management worksheet that will help you come up with an action plan and organize your outstanding debt payments.
Divide your income that you receive per month into both your debt payoff account and your savings account too. Why do this instead of paying off the debt as quickly as possible? Doing this is crucial because expenses won’t vanish from your life till you are paying your debt. Keeping in mind the future needs and avoiding a debt like situation in the coming times, saving is essential.
The reason people get into debts is because of this attitude of not saving up for future. American economy hit depression recently because people did have savings at all!
Once you get over the debt, your attitude towards money is sure to change. Keep saving from the beginning itself.
How do allocations work?
One can start off by a 95/5 allocation system which means that 95% of your income would go to the debt obligations and the remaining 5% would be kept safe in your savings account. For better understanding, assume that one earns $100 and opts for the 95/5 allocation system. Then $95 would be used in paying the debt obligations and $5 would be saved.
Gradually, change the percentage of money allocated for savings. Increase it to 80/20, then 60/40 and so on. This way a healthy savings account would be set up side by side.
There is one glitch though, the money that you are saving up will be charged interest because of your debt. But the interest you pay won’t be more than what you save, so it is not wise to not save because of being charged interest.
Paying off debts can’t be solved by a particular formula because it varies from person to person. Still a few points mentioned above will always be useful. Also start saving early!