Life Kit
Savings strategies that actually work
Savings strategies that actually work
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So you’d like to pay off your credit card debt. But you’d like to also build your savings accounts. Is it possible to do both?
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Yes, say financial experts — and in fact, it’s recommended.
“If you don’t have a nice pile of savings, when another emergency or unexpected situation comes, you’re gonna end up right back in credit card debt,” says Yanely Espinal, a financial educator and the author of .
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With careful planning and budgeting, it’s possible to make aggressive payments to your credit card debt saving for the future. So resist the urge to throw all your money into your credit card payments. Instead, use this moment as an opportunity to get your finances in order.
In this step-by-step guide, Espinal and Tania Brown, an Atlanta-based certified financial planner, explain how to keep up with your payments while staying off the hamster wheel of debt.
Step 1: Track your spending and see where you can cut back
To pay off your credit card debt, you’ll need money. It’s time to revisit your budget.
🗓️ Brown tells her clients to use a paper calendar, but you can also use a notebook.
Try not to use an app that tracks your spending for you,says Espinal. Manually writing out your daily expenses helps you “see the details of where your problem areas are.”
Then, review all your expenses and ask yourself:
Maybe nip your matcha latte habit in the bud, or cancel that magazine subscription you rarely read.
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“You don’t have to cut everything while paying off debt,” Espinal says. That deprivation might tempt you to start spending again. Instead, think of expenses you can live without for a few months, like if you’re paying for multiple streaming services, cut a few you don’t use often.
Rethink your spending habits. Try a spending fast, resist impulse shopping or research ways to save money at the grocery store. Or maybe you want to try something more drastic, like moving to a place with cheaper rent or getting a roommate.
If you can’t find the extra cash in your current budget, you may need to find it elsewhere, says financial educator Rita-Soledad Fernández Paulino. That might mean looking for a higher-paying job, asking for a raise or taking on a side hustle.
The more funds you set aside to throw toward your debt, the faster you’ll be able to pay it off. That amount is completely up to you.
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Let’s say you’ve done your analysis (and some soul-searching) and have decided to cut modestly from your budget. Here’s what your cuts could look like:
That’s a decent chunk of cash to put toward your debt journey.
Step 2: Set up emergency and “sinking” funds
As you begin your debt-payment plan, you’ll want to avoid using your credit cards for big purchases you can’t afford. To do that, you’ll need to set aside funds for emergencies and upcoming expenses, Brown says. The idea is to pay for things with cash, not rack up more debt on your credit card.
Here’s what you’ll need to start:
That can help cover, say, an unexpected hospital bill as well as car and home repairs. Once you’ve paid off all your debt, Brown recommends trying to save three to six months of expenses for your emergency fund.
Whatever you’re putting towards emergencies, consider setting up an auto-deposit out of every paycheck, so you don’t have to remind yourself to prioritize it.
🎁 , Brown says. The amount depends on your individual needs. For example, maybe you know that in the next year you’ll have to buy replacement items for your first-aid kit, Christmas presents and new tires for your car. Starting to put this money aside now will help you stay out of debt later and prevent last-minute panic.
Step 3: Make a budget
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How do you make sure you’re staying on track with your savings and debt payments? That’s where a budget can come in handy, Espinal says.
If you don’t have a monthly budget already, go ahead and make one. A budget should have line items for all your monthly expenses, including housing, food and transportation. (Need more advice? Check out our story on how to make a budget.)
🚨Then, you’re going to .”
Remember that $270 we saved in Step 1? We are going to use that to pay off credit card debt. You can use a free online debt calculator to help you decide how big your credit card payment should be.
You should be making the minimum payment on your credit card. If you don’t, you’ll be hit with late fees, your credit score will drop and eventually your debt will go into default. Making extra payments can help you pay off your debt faster and reduce the amount of interest you pay.
Once you pay off your credit card and stock up your emergency and sinking funds, you can start putting that extra cash into whatever financial goals you have next, whether it’s paying off another credit card or saving for a big purchase.
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