Debt can be a heavy weight on your finances. It can hinder your spending in the short term and cause your savings to fall far behind in the long term. Fortunately, by making a few financially savvy decisions, it’s not impossible to pay off debt while contributing regularly to your savings.
Follow these five easy steps from Bank of America’s Better Money Habits to tackle your debt and reach your savings goals:
- Find out how much money you owe.
The first step to reducing debt is to find out exactly how much you owe. Though it may seem a little daunting at first, calculating your total debt will give you a sense of where you’re starting and help you create a realistic plan of action.
To stay organized, create a list that includes your creditor’s name, the total amount due, the minimum payment required, and the monthly due date. Having this list will help you stay on top of your monthly bills.
- Create a budget to determine how much you can save.
Creating a budget is one of the most effective ways to manage your money. To start, calculate your monthly expenses. Be sure to include your rent or mortgage, car expenses, utility bills, food, and the minimum payment for each of your debt repayments. Be sure to include a line for your savings deposit so you can continue to work towards your savings goals while you pay down your debt. Tally it up and subtract it from your total monthly income.
If you have money leftover, you can also include your regular spending on things like clothes or entertainment in your budget. If there’s no wiggle room, you might want to cut back, whether you cancel cable or other monthly subscriptions that you don’t need, negotiate a more affordable phone plan, or reduce how often you go out to eat. >> Learn more about budgeting.
- Contact your creditors to explore repayment options.
You may be able to negotiate a more affordable payment plan with your lenders. Make a phone call to find out your options. Student loans, for example, might offer an option for income-based repayment or a means to apply for forbearance, which may buy you time before your next payment is due. If you have a large outstanding balance on a utility bill, most gas and electric companies are also willing to work with you and create a payment plan. >> Learn about student loan repayment.
- Set a goal and make a plan.
Now that you’ve done the legwork, you can safely say that your goal is to pay off debt. We know that savers with a plan are twice as likely to save successfully, but the same can be said of paying down debt.
While you continue to make the minimum monthly payment on your other debt, plan to pay a little extra each month on your highest interest bills. Interest accrues each month so the longer you wait to pay down your high interest debt, the more money you’ll owe in the long run.
Once you’re able to pay your balance in full, you’ll have one less bill to worry about.
Give yourself a realistic timeline for when you’d like to pay down each bill and stick to it. Even when the going gets tough, pay the minimum balance on time to avoid damaging your credit score over time.
- Commit to your goals.
Taking the America Saves pledge will help you reach your savings goals. When you commit to your goals through the pledge, you will receive text message reminders to make your savings deposits. We also send you helpful savings tips and resources to help you reach your goals!