Balancing Debt Repayment and Saving: Finding the Right Approach for You

With debt repayment and saving, a family has a lot of options to deal with the subject. Where should you start to develop a plan of action that can be manifested so you can focus your thoughts on the desired outcome and make the financial plan become a reality? This can be one of the most difficult activities that you and your spouse can go through. It takes a big commitment from those making the decisions to first share with each other your WHY as well as share your emotional concerns to get everyone involved on the same page. Everyone needs to buy in on the plan to achieve the goal(s). This includes everyone sticking to the budget, everyone committing to the plan, and then everyone following through with the plan. Do you want to reduce the financial stress in your life? You have to set financial goals with a timeline to keep your plan on schedule.

To find a balance between debt repayment and saving, you need to develop a plan and revisit the plan regularly so that it comes to fruition. It may take sitting down together with the TV turned off and sharing your dreams and goals with each other. Where do you want to be in 5, 10, and 20 years from now? The following are steps to follow to develop a passionate approach to help you be successful.
This includes:

• 
  $1,000.00 emergency fund.
  Develop a detailed budget.
  Contribute enough to your 401K to receive the full employer match.
  Start a sinking fund account to pay for those items you need to save for.
  Develop a plan to pay off your consumer debt and student loan debt.
  Build the emergency fund up to three to six months' worth of expenses.

Some of these need to be completed in order. Don’t try to do all of them all at once. Focus on numbers one and two first, and you will have success.

$1,000.00 Emergency Fund

You can say it is saving, but everyone needs a $1,000.00 emergency fund to cover actual emergencies. In an article from Bankrate.com, only 43 percent of Americans would be able to pay for an unexpected $1,000.00 emergency from their savings.
When you get the emergency fund funded, do not touch it unless it is an emergency. Don’t use it to pay for gifts for Christmas or birthdays, go out to eat with friends when you don’t have money in your checking account, or buy a new piece of furniture because “I want to buy that item”. All of those non-emergency items just listed should be accounted for in your budget. Don’t worry about the rate of return, because it is there for an emergency.

Develop a Detailed Budget

A tool that helps you find extra money for saving or paying debt is a budget. The budget is a financial roadmap to follow so that every dollar is accounted for. That means every dollar has a name on it. This includes food, shelter, transportation, and clothing. It also includes saving money in your sinking fund for Christmas, school field trips, Birthday gifts, and a little bit of fun money to reward financial accomplishments.

A great budgeting APP is EveryDollar found here. It’s free! This program can help you find the extra money hiding in plain sight and help you cut your monthly expenses by eliminating those non-essential items from your budget. Look that budget over and see whether you can decrease expenses. For instance, how many streaming services do you subscribe to? Downsize to one streaming service. Change to a cheaper cell phone plan. Delay new purchases. When you eliminate or reduce your expenses, you can apply that newfound money to your debt(s) or savings.

It will take 2-3 months to get used to living within your budget and working through the process, but when you get used to working with the budget and living within your means, it will feel like you got a raise. When an unexpected expense comes up in the middle of the month, call a budget meeting with your spouse to discuss the issue, do some problem-solving, and adjust your budget. This will eliminate the stress it might create. Communication is especially important.

Contribute to the Companies 401K

Once you have your $1,000.00 emergency fund in place and you’re living with a budget, start to contribute enough to your 401K to capture the employer match. This will get you started saving for retirement. Set it up so it automatically comes out of your check. That way you won’t even notice it. If eliminating debt is more important to you, don’t contribute to your employer's 401K plan until your debt is paid, you should be able to catch up if your goal is to retire the consumer debt in 24 or 36 months or less. A goal would be to save 15% of your income in retirement accounts.

Sinking Fund in Your Budget

Along with contributing to the company’s 401K to get the match, it would be a good idea to open another account to save up money for those everyday occurrences that don’t happen every month, such as Christmas, birthdays, school supplies and clothing, tires for the car and other auto maintenance items, along with other big-ticket purchases. Christmas happens every year at the same time, so it should not be a surprise. The sinking fund is not an emergency fund, but it is money that is earmarked for a future purchase. Again, don’t use those funds except for the item you are saving for.

Develop a Plan to Pay off Your Consumer Debt

With your budget in place, you should be able to determine how much money you have available to retire debt. The process, debt snowfall, lists the debts from smallest to largest. Pay the minimum amount on all the debts except the smallest debt, attack the smallest debt, and pay it off quickly. The next step would be to take what you applied to the smallest debt plus the payment on the next smallest debt and attack that debt.

You get more momentum from eliminating a debt rather than paying on the loan with the highest interest rate. Which sounds better? Eliminating the number of loans that you pay on or just paying down on debt but still paying on the same number of debts? For example, if you start with 6 loans that you pay on for 12 months, but you are still paying on 6 loans after that 12-month period, you can lose hope.
With the debt snowball method, if you have 6 loans when you start and in 12 months you only have to pay on two loans. There is an attitude of achievement, and you will stay motivated. There is a positive psychology of eliminating the number of debts.

Get after the student loan debt. People held out for loan forgiveness on federal student loan debt during COVID-19, even those people who could repay their student loans and had the ability to pay the debt did not repay the student loan debt. Get those loans out of your life. Pick up an extra job to pay off those student loan debts. You can’t bankrupt student loans and I think you will sleep better at night.
Also, don’t get caught up in the idea that you are missing out on 10-12% return on your money in the stock market. If you are paying 18-24% on a credit card and you eliminate the credit card debt, that is giving you a better return.

Fully Funded Emergency Fund

Once the consumer debt is paid, build that emergency fund up to three to six months of living expenses. Refer to your budget to help you determine how much that dollar amount should be. Again, don’t dip into the emergency fund unless it is an emergency. If you want to purchase a car, discuss that want in your monthly budget meeting and put that item in your budget so you can save for that purchase.

Retirement Savings

Now you can start saving for retirement. There are lots of different opinions on this. A good start would be to save 15% of your income for retirement. You can also set aside 15% of your income for your children’s education.
Another rule of thumb is the 50/30/20 Rule. Fifty percent of your take-home pay should go to family living expenses, Thirty percent should be designated for wants and more fun items, and twenty percent should go to savings and debt repayments. Keep using that budget.

Everyone has a different financial situation.  There is a bit of a balancing act between saving and paying debts. The budget is a great tool to help you prioritize where you want funds to go to become financially independent. For more ways to balance debt repayment, find more information at some more of our blogs. 

David Lantz

Senior Vice President of Ag Banking