10 Useful Tips to Climb Out of Debt and Save

Money, Tips & how-to

What to do first — pay off that debt or start saving? It’s very possible to do both, but it will take some strict and creative budgeting–along with some will power.

When people are facing debt and limited or no savings, it can be difficult to figure out where to start. Debt is stressful, both financially and emotionally, and it’s important to stay on top of it. However, it’s also important to have a retirement account and emergency funds just in case. Here are ten ways to climb out of debt with a little savings to boot.

1. Create an Emergency Fund

Before you start paying down debt like crazy, make sure you still have cash on hand for a rainy day. It might seem counterintuitive to hold on to your cash when there are high-interest debts to be paid, but having a safety net is a high priority if you want to avoid more debt (and interest) when your car breaks down. Ideally, you should have 3 to 6 months of expenses saved up in case of a job loss, but even stashing $1,000 will help in an emergency.

2. Budget

Every financial plan should start with a carefully thought-out and written-down budget. Even if your income is irregular, knowing your average income and what you’re spending will help you see where to cut back. Try to account for every penny you earn when you budget, and cut back by finding free fun things to do. Take odd jobs where you can to increase your income as well, and sell your junk.

3. Snowball Your Debt

Focus on paying off one debt at a time to keep yourself motivated. Keep paying at least your minimum payments on each debt, but focus as much money as you can onto one debt (the one with the highest interest rate, or the one with the lowest balance if that helps keep an end in sight). When one debt is paid off, take the money from that payment to focus on paying off the next one, and so on.

4. Consolidate

Debt consolidation can lead to lower payments, such as student loan debt. Make sure, however, that consolidation doesn’t lead to higher interest rates or unmanageable payments in the long run. Choose a reputable company that will ensure your debts get paid to the right creditors and not unauthorized debt collectors.

5. Negotiate

The worst thing you can do about debt is nothing. Instead of waiting for debts to go into collection — wrecking your credit — call your creditors to see if you can lower your payments. It can’t hurt. Do realize that any forgiven debt could be considered income to you, so consult with your tax advisor on whether this is a win for you.

6. Consider Credit Counseling

Non-profit debt consolidation companies can negotiate lower interest payments for clients. It might even be possible to get 0-percent APR when handing debt over to a credit counselor, but credit will be locked and payments will be automated until the debt is paid off entirely. Credit repair companies often charge fees that don’t exactly help your financial situation, however, so stick to free services — those provided by a home builder’s preferred lender, for instance.

7. Automate Payments

Always try to set up automatic payments where possible.  This will avoid late payments and dings in your credit. If possible, automate a certain percentage of each paycheck to go towards a savings account. Open a checking account that’s solely for paying off debts and automate a percentage of each paycheck to this account. It makes debt payments and saving seem effortless and painless.

8. Make Daily Efforts to Save

Most people overpay and overspend on things that they wouldn’t even miss. Try giving yourself some cash in an envelope that you can spend on extras during each week, so you have a visual reminder of how much cash you have left.  This way, when you go to reach for a bill to pay for movie tickets, you’ll realize you don’t have enough left for the new DVD you wanted to pick up later — and you’ll think twice.

9. Set Mini Goals and Rewards

Getting into the habit of paying off debt (and not just the minimum balance) and saving can be difficult, especially when someone is used to indulging in luxury items. That’s why mini goals and rewards are so important. When a certain small goal is reached, such as paying off half of a debt, have a reward in sight. This reward can even be somewhat dependent on money, such as a night at a favorite restaurant, since savings have also been put aside for special events.

10. Don’t Put Your Eggs in One Basket

Don’t focus only on paying off debt at the expense of savings or vice versa. Instead, tackle your finances from all angles. Don’t be afraid to ask for free help from a credit counselor or financial adviser.