Credit card debt is extremely common, the average American household has at least $15,000 in credit card debt, and overcoming the shame associated with it can help us make an intelligent financial plan to conquer it once and for all. An essential first step to planning how to get out of credit card debt is negotiating the decision to invest more in monthly payments or savings. Afterall, how do you determine whether you should pay off debt or save?
Annoyingly, there is no one-size fits all answer to this question. The good news is that paying off credit card debt and saving are not, and should not, be mutually exclusive. Check out our tips to help determine the best financial path for you to allow you to both save money and pay off debt.
Prevent future debt
First things first—make a plan to prevent accumulating future debt. For most of us, this means that we need to create an emergency fund to cushion the blow of any possible unforeseen expenses like illness, car repair, and income fluctuations. By creating an emergency fund, we can avoid having to reach for our credit card in the future.
Aside from creating your emergency fund, be sure to stop using all of your credit cards except one, which you should keep available only in the case of emergencies. Also make sure to curb unnecessary spending. Preventing unintended debt accumulation is one of the smartest financial decisions we can make.
Nail down debt and interest rate figures
Next, review your debts and their respective interest rates. Your top priority should be not to default on any payments.
This means that you need to make at least minimum payments on all of your debts. It is also important to clearly understand how much you owe on each debt and the interest rate of each in order to strategize how to pay off debts faster.
Strategize how to pay off debt
If you have multiple (especially consumer) debts, you should strategize to pay them off faster, so to avoid paying more over the long term from accrued interest.
First, make a list ranking your debts according to value and interest rate. It is often recommended that consumers begin making larger payments on either the smallest debt or the debt with the highest interest rate. Once you have paid off your selected debt, tackle the next debt with the second highest interest rate or that is lowest in value.
To pay off debt even faster, continue to make the minimum payment plus the value you were previously paying on the recently resolved debt. Using this strategy, you won’t feel a difference in your day-to-day budget, but you will begin making larger payments that will help you resolve your debts exponentially faster.
Save and pay off debt simultaneously
As you strategize on how to free yourself from these financial obligations, remember that freeing yourself of debt and saving are not mutually exclusive. Any healthy budget (like the 50/30/20 rule) allocates a portion of income to daily living expenses and flexible spending, as well as savings and paying off debt.
Even as you pay off debts, many experts recommend funneling 10-15% of your income into savings because, over time, interest will help these originally modest savings grow. After you’ve saved up an emergency fund, continue saving at least some portion of your income every month. Once you have paid off your debts, you can funnel the money you previously used to pay off debts into savings and investment plans.
Credit card debt can feel scary, taboo, limiting, and insurmountable. However, through a few concrete steps including clarifying and prioritizing debts, strategizing payments, and organizing savings, you can begin to free yourself of these frightening financial obligations.
With a bit of know-how, planning, and mental calm, it is possible to pay off debt and do it in such a way that permits you to simultaneously meet other financial goals, like saving and investing.