6 Strategies for Paying Down Debt and Building Savings

The Lowdown on High Interest

Review the interest rates you’re paying on your credit cards or personal loans. You’re shelling out much more in interest than you’d earn in a savings account, so focus on paying down high-interest debt first.

Can you tackle your debt and pump up your savings at the same time? The answer is yes. We’ll show you six strategies to help you do both.

Balancing Act

Paying off your debt while building your savings can be tricky, but it’s all about balance. Do you want to put more money toward reducing your debt or more into long-term savings? The key is finding the balance that works for you. And the sooner you start, the better equipped you’ll be to reach your financial goals.

3 Debt-Reduction Strategies

Let’s say that in your balancing act, you’re more concerned with lowering your total debt. Follow these three tips:

1. Create a Budget
   1. This is an essential first step. A budget will help you keep track of where your money is going and can also help you identify where you can cut expenses. Using an app or a spreadsheet program to create your budget, first list your income and expenses. Then, subtract your fixed expenses from your income to get your free cash flow. That’s money you can use to cover variable expenses and pay down debt. If you find you have $300 per month you can use, you might allocate $200 to pay down high-interest debt and tuck away $100 in your emergency savings fund.
2. Reduce Your Spending
   1. Once you’ve created a budget, look for ways to lower your monthly bills by reducing or eliminating expenses. Do you need all those streaming services or cable channels? Are you really using that gym membership? By cutting back just a little, you can free up more cash that you can put toward reducing your debt.
3. Lower the Interest You Pay
   1. Taking advantage of a 0% balance transfer to pay off higher-interest credit cards could be a good move. Just be sure not to run up new charges and to pay down (or pay off) the balance before the end of the 0% promotional period. If the interest rate on your student loans is 8% or higher, you might consider refinancing them. Lowering your interest rate means you’ll be paying less over the life of the loan.

3 Savings Strategies

We’ve looked at reducing your debt, now let’s discuss how you can focus your financial efforts on building up savings, including your retirement accounts and emergency fund. Here are three tips:

1. Feed Your Emergency Fund
   1. If there’s one thing you can expect in life, it’s the unexpected. Maybe your fridge conks out or your car breaks down. You’ll want enough cash on hand to cover these emergencies. And you can start small if you need to. Putting away even $25 a week is better than not saving at all. How much should you save? Experts recommend having at least three to six months’ worth of living expenses set aside in an interest-bearing savings account, so be sure to include a line item for emergency savings when you create your budget.
2. Bulk Up Your Retirement Savings
   1. Once you’ve created a budget, look for ways to lower your monthly bills by reducing or eliminating expenses. Do you need all those streaming services or cable channels? Are you really using that gym membership? By cutting back just a little, you can free up more cash that you can put toward reducing your debt.
3. Boost Your Income
   1. Everyone seems to have a side hustle these days, whether it’s driving for a ride-hailing company or selling crafts online. In fact, one in three American adults is part of the gig economy. A side gig can bring you a steady stream of income, and the extra cash you earn can go to savings or to debt reduction – or, better still, to both.

Automate Your Debt Payments and Savings Contributions

Here’s a bonus tip. To make putting away money easier, you can set up automatic contributions to your emergency fund, retirement accounts, or even an account created for a special purchase. Setting up automatic payments for regular monthly expenses simplifies bill paying and can help you avoid late fees.

The Right Balance

It might be tempting to put off savings while you’re paying off your debts, but that can hurt you in the long run. Setting savings goals and sticking to them is a smart strategy, and your future self will thank you. Reach out to your financial institution for help planning your finances.