How to start saving while paying off debt

Personal Finance,

Disclaimer: Upstart is not a financial advisor, the following content is for informational purposes only.

Paying down debt while trying to save is a topic that many financial experts seem to have strong opinions about. 

  • Should you put your savings on hold while you pay off debt? 
  • Or do you continue saving and potentially struggle to make larger-than-minimum payments on your debt? 

The advice from some is to save while paying down debtwhat if you hurt yourself and suddenly have high out-of-pocket medical bills to pay? 

Others think it’s best to focus all your effort (and money) on paying down debt before you start saving. This is especially true if your debt comes with high interest rates. Take credit cards, for example. The average interest rates can be 21 percent or more

How you save and pay off debt depends on your financial situation

The truth is, there’s no magic, one-size-fits-all answer for how you should save or pay off debt. It depends on your level of debt and income and how much you already have in savings and investments. 

Saving while paying down debt may not always make perfect financial sense, but building up your savings can provide peace of mind. Putting one’s fears at ease may be more important and urgent than paying off debt. 

Saving and investing as early as possible is also important, as the power of compound interest will work in your favor. 

Here’s how to start saving while paying off debt and the recommended moves, depending on your situation. 

If you have some savings but also have high-interest credit cards to pay 

In case you lose your job or have unexpected bills to pay, it’s recommended that you have at least  six months to a year’s worth of savings. If you have some savings already, such as a month or two of living expenses put away, prioritize paying your high-interest cards first. 

If you have several high-interest credit cards you’re juggling, consider consolidating them into one loan. Upstart offers personal loans to help pay off your debt. The interest on personal loans may be lower than credit card interest rates, so you may save money on interest. 

You can also free yourself from the burden of paying multiple credit cards on different due dates. Another added benefit is that you can pay off Upstart’s loan early without any penalties. 

Tighten your spending and consider using that money to pay down debt

Because you don’t have an endless supply of money, you may need to scale back on your monthly spending so you can focus on adding more money into paying down your debt. 

Here’s a quick snapshot of areas you could potentially limit your spending for the month:

  • Eating out/restaurants
  • Entertainment
  • Ride sharing (Ubers/Lyfts)
  • Cancel subscriptions you don’t use
  • Shopping/Amazon purchases

If you have zero in savings

Not having anything set aside for emergencies and irregular expenses means you’re leaving yourself vulnerable to racking up more debt. Examples of irregular expenses include your lump sum car insurance payments, sudden medical expenses, or getting your car fixed.

Balance your budget so you’re putting more money into savings than debt. Your goal should be to save up at least a few months’ worth of living expenses. You may need to make minimum payments on your debt for a while. It’s not the end of the world, as long as it’s temporary and you have a timeline in place. 

2 ways to quickly pad your savings

  1. Consider trying a spending freeze. This means you commit to only spending on necessities during the allotted time (bills, groceries, rent, mortgage) and to stop spending elsewhere. 
  2. Increase your income. Use your skills to bring in extra income. This can include anything from freelance work, babysitting, driving for a rideshare company, or renting out an extra bedroom on Airbnb. 

If the thought of making minimum payments makes you cringe, pay a little more than the minimum amount while you work to pad your savings account. 

If you don’t have high-interest debt and lack long-term investments

Unlike credit cards, mortgages, student and auto loans tend to have low interest rates. If you don’t have high-interest debt but don’t have enough in your investment accounts, consider shifting your focus on investing before paying off your mortgage or car loans. 

The logic in this recommendation is based on interest rates on your debt versus how much interest you could potentially earn from the stock market. The average annual returns for index funds through the end of 2018 were about 7.96 percent

In other words, if the interest rate on your mortgage is 4 percent but the potential return on the stock market is 7 percent, focusing on your investments may make more sense. 

Why long-term investments matter

Long-term investments are important for retirement. If you know your retirement funds are lacking (based on your age, when you want to retire, and how much income you need during your golden years) start putting money away more aggressively into your 401(k) or IRA.

If you’re already making contributions, consider increasing the amount or max it out. In 2020, you can contribute up to $19,500. This is an increase from 18,500. 

Consider signing up for your company’s 401(k)

If your employer offers a 401(k), sign up. The best way to invest in a 401(k) is to make sure you’re contributing enough to get your employer match. Sometimes employers offer a percentage of your salary. This is free money. Here’s a quick example:

Let’s say you earn $50,000 a year and you contribute 6 percent of your salary into your 401(k). This gives you $3,000 in the first year. If your employer matches 100 percent, you’d have $6,000. If your employer matches 50 percent, you’d have $4,500 in the plan. 

How will you improve your finances?

Saving while paying off debt involves planning and an understanding of how much debt you have and what kind of interest you’re paying. You may also need to make lifestyle shifts when it comes to spending so you can focus more on saving and getting rid of your debt. 

There’s no right or wrong way to pay off debt and save, it’s all a matter of coming up with a strategy and sticking with it to fulfill your financial goals.

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