It’s hard to think about saving anything when you’re in debt and just trying to climb out of the hole. If you’re like me, you might not have another good night’s sleep until you are totally rid of your IOUs. In that case, eliminating them should be your priority for peace of mind. Many financial advisors recommend paying off high-interest debt first before addressing any other financial goals, simply because of the math. They have a good point if you think about saving money in an account paying one percent instead of paying down a credit card balance being charged 16 percent interest. You are essentially losing 15 percent!
So, how do you get rid of bad debt for good? First, hide your cards so you don’t rack up more debt. Then, try calling your creditors to negotiate lower rates and repeat those calls periodically. In the meantime, use this calculator to organize your debts and create a clear payoff plan. Debt consolidation programs are tempting, but typically come with upfront and ongoing fees and the application process can be a time-consuming headache. You can save yourself time and money by managing your debts yourself.
Additionally, you should track your income and expenses so you can identify areas of overspending to cut back on in order to increase your debt repayments and eliminate them sooner, rather than later. If you are not an Excel or write everything down person, companies like Mint, Personal Capital and HelloWallet offer tech-friendly money management software that can help.
Some financial advisors say you should definitely make saving the priority if you have no emergency fund (to prevent going into further debt if an unexpected expense arises) and if you work for a company who offers a contribution match in their retirement plan (so you can take advantage of the retirement savings boost). In that case, make saving $500 in an emergency fund your primary goal before paying off more debt. Either transfer as much as you can immediately from your checking account to a savings account (local credit unions often offer better rates than big banks or you can shop rates here) or set up a monthly automatic transfer of at least $25 from one to the other.
Additionally, set up paycheck deductions through your employer for their retirement plan (if you haven’t already). You will have to start small, but at least commit to increasing your contribution amount every year.
Many experts claim -- and I agree -- that trying to save and reduce debt simultaneously is ideal, because it’s the best way to change your negative money habits and retrain yourself to be financially responsible.