Debt and Savings: How to Tackle Both

Erin Lowry writes Broke Millennial, a weekly blog designed to help members of “Generation Me” become fiscally responsible. 

Dealing with debt can be an anxiety inducing experience. The notion of being able to save while struggling to make ends meet is simply laughable. How dare someone suggest you build an emergency savings fund, or contribute to retirement when student loans, rent and credit card bills already eat up more than 60% of your monthly income? Even though it feels hopeless, there actually is a path to balance the opposing forces of paying off debt and saving for the future. In fact, you can get there in just five steps.

1. Set a budget

The most important step in the journey to both debt repayment and wealth building is setting a budget—a task that is often considered to be about as enjoyable as sitting in a dark room whilst listening to the Macarena on loop. No matter how unpalatable you find the task, it’s an essential part of financial health.

To get started, take a week or two to track every penny you spend in order to see where your money goes. This tactic helps highlight a few places you can scale back in order to redirect funds into savings or towards debt repayment (or both). The good news is that once the two-week exercise is over, you don’t have to keep tracking every penny to create an effective budget.

Take some time to sit down and list out all monthly expenses (rent, student loan payments, credit card payments, cell phone bill, etc.) and subtract the expenses from your monthly take-home pay after taxes, known as net income. You should also subtract your retirement contribution. If you haven’t set it up yet, now is the time. The remainder is what you can spend in the month.

Before you get too excited, remember some of that money needs to get saved, which is why it’s important to automate.

2. Automate your savings 

Saving shouldn’t be the last item you check off your list; it should be the first thing that happens before money hits your checking account. At a bare minimum, you should have a goal to save $1,000 in an emergency savings fund. It’s particularly important if you already have debt, because the unexpected could sink you deeper into the hole, making it even harder to ever climb out.

You aren’t the only one who gets to the end of the month and thinks, “Man, I just don’t have anything left over to save.” This problem gets eliminated by paying yourself first.

Set up a percentage of your paycheck to get automatically routed into a savings account before it’s deposited. You can usually do this by logging into your company’s benefits portal or speaking directly with human resources.  You can also set up a recurring transfer through your credit union’s website. Just be sure the transfer corresponds with your paydays, so it never leaves you in overdraft! This may feel like an impossible feat because every dollar matters, so start small. Even routing just two dollars into savings begins forming the habit, but don’t stay comfortable with the small contribution forever. You should steadily increase the percentage you tuck away as you pay down debt and earn more money.

Don’t forget to also pay yourself whenever you receive an unexpected windfall, like an end of year bonus, a tax refund, or even a birthday check from grandma.

Once you decide to set up that monthly payment to your savings account, be sure to check about a contribution to your 401(k).

3. Take advantage of employer-matched retirement accounts 

Gone are the days of company pensions, which means it’s on you to start saving for retirement. Most 20-something-employees dismiss the importance of saving for retirement because it just feels so far off. But if your employer offers to match your contributions, then you’re leaving free money on the table!

Talk to Human Resources or your manager at work to see if you receive an employer match. A common example would be that your employer matches 100% of your contributions to retirement up to 4%.

That doesn’t sound terribly exciting. Let’s look at it this way:

You earn $30,000 a year. Contributing 4% of your paycheck means you tuck away $1,200 a year into your 401(k) and your employer is willing to match you by also contributing $1,200. That means you end up with $2,400, just by putting away a little bit of each paycheck into a retirement fund.

Just remember, you can’t touch this money until you’re 59 1/2 years old without paying a tax penalty (yes—there are some exceptions to the rule).

Think you can’t possibly make do without that $1,200? Then it might be time to cut some nonessentials.

4. Cut some of the nonessentials (then actually save) 

Unless you’re a budgeting savant, then odds are you’re probably paying for some nonessentials or could switch to cheaper options of existing payments.

The standard ways to trim the fat include: cutting cable, avoiding mindless shopping when you’re bored, skipping daily coffee runs and brown bagging it to work.

After you trim the fat in some of your monthly spending, be sure that money is actually routed toward your savings account or debt payments and not just left in checking to get spent.

5. The final trick: increase your income 

It sounds hopeless, almost as laughable as asking you to pay down debt and save at the same time, but increasing your income really isn’t that insane. This can be done by either doubling down on your efforts at work in the hopes of a promotion and raise, or getting a second job. There are a myriad of ways to start side hustling (seriously, just Google the term).

The only way to get released from the shackles of debt and begin to build a respectable savings account is to get serious about addressing your money issues and working hard. But if you’re reading this, then you’re certainly ready to get started!

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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.

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