How To Build Wealth While Paying Down Debt
/If you have debt, especially high-interest credit card debt, I encourage you to pay it off while also putting money into a savings or investment account. High-interest debt is an expensive burden to carry, and generally speaking, paying this down needs to be a priority. But you also want to save for your goals. If you simply put every dollar you earn into reducing your debt, this can leave you ill-prepared for financial opportunities or financial emergencies.
Even if you put a small amount of money into a savings account on a regular basis while you pay off debt, then you will have built up a cash reserve by the time your debt has been paid off. So, how do you build wealth while paying down debt? This article will show you how to do both at the same time.
Figure out how much extra money you can allocate to debt and savings
Instead of allocating all of your extra money to debt, allocate some of your extra money to your savings account. With this strategy, you can build wealth while paying down debt.
First, figure out how much extra money you could allocate toward your debt payment each month on top of your minimum monthly payment. Once you know how much you can afford to pay toward your debt each month, then you need to decide how much you want to throw at debt each month and how much you want to put into your savings account each month.
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You could start out with a 95/5 allocation where you allocate 95% of your extra money toward your debt and allocate the rest 5% to your savings account. For example, if you have an extra $200 every month by cutting down expenses or earning extra money, or by doing a combination of both, then $190 will go toward your debt payment on top of your minimum monthly payment to pay down debt and then $10 will go toward your savings account.
Even if you put a small amount of money into a savings account on a regular basis while you pay off debt, then you will have built up a cash reserve by the time you become debt-free.
You can change your debt/savings allocation depending on your financial goals. For example, if you have paid off a debt, you may allocate 20% of your extra income to your savings account.
Boost your savings account
Even if you have high-APR credit card debts, first you should have some money that is readily available in the event you are faced with a challenge like a sudden illness or job loss. That is where your savings fund comes in.
Many financial experts recommend that you should establish a savings fund that would cover at least three months' worth of living expenses. One of the easiest ways to do so is by setting up an automatic transfer of a set amount from your paycheck to a savings account each time you get paid. If you work for yourself, have a weekly money date where you transfer a percentage of your earnings into your savings account.
Even if you start with a small sum, it is worth securing your safety net while paying down debt. If you pay yourself first, you will reach your savings goal quickly.
Contribute to your workplace retirement account
If you work for an employer who offers a retirement plan, put money into your 401(k) while paying down debt especially if it includes a match. A match is basically free money. You should contribute enough to your 401(k) to take full advantage of your employer's matching funds.
If you do not have access to an employer-sponsored retirement plan, you could set up an individual retirement plan (IRA). To learn more about self-employed retirement plans, read this article.
Always pay more than the monthly minimums
Getting out of debt may seem impossible, especially if you are only making the minimum monthly payment. But if you focus on paying more than what is owed on your minimum monthly balance, you will pay off your debt quickly. If you have multiple credit card balances, try to pay off one card at a time before tackling the next one. As you pay off a credit card, it will feel (and is actually) like a win and will motivate you to keep going.
If you continue to throw as much as possible at your debt on top of your minimum monthly payments, you will get your debt paid off quickly.
Pay off your debts with the debt snowball method
If you have more than one credit card debt, focus on paying off one specific debt first by making more than the minimum payment on that debt on time each month while making the on-time monthly minimum payments on all of your other debts. You can either pay off the debt with the smallest balance first or pay off the debt with the highest interest rate first.
If you want to pay off the debt with the smallest balance first, it is called the debt snowball method. Whereas, if you focus on paying off the debt with the highest interest rate first, it is called the debt avalanche method.
Say you have multiple debts that total $1,000 minimum monthly payment. If you pay off the smallest debt first with the debt snowball method, and bring down your total monthly payment to $800, you continue to pay $1,000 a month until all of your debts are all fully paid. When you pay off one of the debts, you use the money that you used to pay off that debt to pay off the next smallest debt.
Once your debt is paid off, instead of spending the $1,000 you were putting toward your debts, use that $1,000 a month to put into your savings account or retirement account.
Save as much as you can afford
If you can save say $200 extra money a month, contribute 5 percent of your extra money to your savings account and 5 percent to a retirement account.
How much you can afford to save each month will depend on your income and spending habits. If you are struggling to build wealth while paying off debt because your income is low or you have expensive habits, you will need to cut out or cut back on some expenses or increase your income to save as much as you can afford each month.
Establish short-term debt reduction and savings goals
To be successful at building wealth while paying down debt, you need to set short-term goals first that are attainable. For instance, if you set a short-term goal to save $500 in three months, you would need to save about $40 a week to reach this goal. Once you reach this savings goal, make a new short-term goal, like saving $750 in three months.
Keep setting a new savings goal until you reach where you want to be, like saving three months' worth of living expenses set aside in a savings account.
Practice conscious spending
While many money bloggers advocate for cutting back expenses, I prefer to practice conscious spending.
Conscious spending is a philosophy that I’ve developed that means being intentional with my money. As opposed to cutting back or thinking in terms of needs or wants, I ask myself if this expense brings me fulfillment and why. This self-reflection informs my spending plan.
While budgets work for some people, I prefer to use the term “spending plan”. It feels less restrictive and more expansive. If you prefer to use the word budget, then feel free to use it.
By creating a spending plan you can find your balance between spending and saving each month. When I create a spending plan, I prefer to work backwards. Some people start with how much they earn and then deduct from there. My approach is to start with how much I would like to spend and then compare it to my income.
If there is a gap where my spending is higher than my income, I will ask myself do I need to cut my spending or increase my income? For me, 99% of the time the latter is the answer that feels right to me. Hence why being a Money Maker is an identity I wear proudly.
Make extra money
There are many ways to make extra money these days thanks to the internet. You can sell unused belongings to make some extra cash fast.
Are you skilled in any particular field? If you enjoy writing then you can start a side hustle online, writing for businesses and individuals online as a freelance writer or blogger. If you are social media savvy, you can become a social media or Pinterest manager for small companies and online professionals, like bloggers.
Are you a native English speaker? Then you can teach English online to non-native English speakers to make money on the side. There are so many ways to make some extra money these days. You just have to figure out what you are good at and then monetize your skills online or offline.
Have a weekly money date
Your weekly money date is the best habit to implement for tracking your weekly progress. By tracking your progress weekly, you will be able to see if you need to make adjustments to your debt repayment or savings goal. If you haven’t already, watch my video on what is included in your weekly money date.
In conclusion
As you have seen, building wealth and paying down debt at the same time can be attainable if you know how much of your extra income you need to allocate to your savings account and how much you need to allocate to debt. Also, you need to understand which debt to pay off first and increase the gap between your earnings and your spending to have more money if you want to build wealth and pay down debt at the same time.
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Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
