Ideally no. In a perfect world, you would have a fully funded emergency fund with three months of your expenses, a separate account for those nonrecurring expenses, and investments for retirement.
But this is real life! We get it. Things happen, and we know that sometimes push can come to shove.
So, should I use my savings to pay off debt? It just depends. Is it high-interest credit card debt? How long will it take you to pay it off without touching your nest egg? Do you have an emergency fund?
When should you avoid using savings to pay off debt?
Emptying your savings to pay off or pay a portion of your debt can be good until it isn’t. If using your savings to pay off credit card debt means leaving yourself financially vulnerable, don’t do it.
That’s not a good situation to put yourself in. Now, I get it; you just want to be done with it. It might not be a great idea to reduce your debt with savings in a few scenarios.
Let’s talk about when to avoid using your savings to pay off debt.
Your job isn’t stable; you’re a freelancer or between jobs.
Don’t use your savings to repay your debt if you’re unsure of your next paycheck. It seems like it should be the correct answer.
But using your emergency fund, or worse, depleting these funds to pay your debt in this situation, can put you in a terrible spot.
Instead, focus on making the minimum payments on your debt until you get your next gig or find a new job. Remember you have your living expenses to cover too.
If you don’t have an emergency fund.
In this situation, paying off your debt with your savings is not the best solution. This can leave you in a position to take on more debt if an emergency or unexpected expense comes up. It’s just not worth it.
You might save some money on interest, but you get into this cycle of paying off debt and getting right back into debt because you don’t have an emergency fund for those situations.
When the debt has a low interest rate.
I know it can be hard to see a balance that you can pay off technically, but remember that you have a plan. Make sure you understand the reason behind your choice. It allows you to focus on other financial goals that you are working towards.
You haven't started saving for retirement.
Retirement? Yup! Retirement is a long-term goal; the earlier you start, the less money you will need. You want to start as early as possible and let the magic of compounding interest work for you.
If you are funding your retirement, make sure you contribute to your employer’s match while paying off debt. Why? Because it’s free money! I’d rather you keep it than your employer (just saying).
The importance of a robust financial foundation
Having emergency savings such as a separate savings account for nonrecurring expenses, and retirement investments is crucial for personal finance success. These elements provide financial security and peace of mind.
Emergency savings act as a safety net for unexpected expenses, while a savings account ensures funds are readily available for irregular costs.
Retirement investments secure your future. It's essential to establish these pillars before considering using savings to pay credit card bills or high-interest debt. They lay the groundwork for long-term financial stability and success.
Assessing your debt situation
Are you ready to take control of your debt and secure your financial future? Know your debt situation.
Evaluate factors like interest rates, repayment timelines, and the presence of an emergency fund.
Take a comprehensive look at your financial picture before making decisions. Consider the impact on your financial security and future goals. Assess whether paying off high-cost debt aligns with your priorities.
Ensure you're making informed choices that save money and contribute to your overall financial well-being.
How to get on with debt repayment without draining your savings
Paying off debt is not a sprint; it’s more like a marathon. Remember, you probably didn’t accumulate all of your debt overnight. So we really can’t expect to repay it overnight either. We want you to successfully pay off the debt while creating lasting habits to set you up for financial success.
Let’s look for ways to repay your debt without depleting your nest egg.
Have a clear ‘why’.
Take a moment to understand why you are not paying off your debt with your savings. Eliminating your debt and wiping out your cushion can give way to taking on debt if an emergency expense happens.
This can be your car needing some repair work, or your heater or boiler dying; these are not cheap fixes, and if you don’t have an emergency fund to pull from, you’re probably going to use your credit cards to cover these expenses. Life happens, and the best we can do is have a plan for those unexpected moments.
Get a Budget & a Debt Repayment Strategy.
Yes, we are talking about your budget or spending plan. Make a plan to assign every dollar a job. You want to know where you are spending your money but, more importantly, that you are working towards your goals.
Also, make a plan to pay off your debt. Grab all your credit cards, personal loans, and debt statements, and create a list; depending on your chosen method, you’ll first pay off the high interest rate or the smallest balance. My suggestion is the smallest balance to create momentum and motivation to stick to your debt repayment plan.
Increase your income to pay off debt.
Whether that means working overtime at your work, getting a second job, or starting a small business, do you have a hobby that you can turn into a side hustle?
Go through your home and get rid of stuff you are no longer using. All these ways will increase your income, but make sure you utilize your increased income to move you closer to becoming debt-free and not increase your lifestyle.
Reward yourself along the way.
Yes, even while paying off a debt, you should reward yourself and enjoy your life. The rewards don’t have to involve cash or purchasing something, but they can. It depends on what brings you joy.
Take the long-term view with short-term action.
Depending on the total amount of debt, your income, and your ability to pay, it might take a while to be debt-free. Let that sink in. This will take time. We want you to progress on all of your financial goals and still enjoy life.
Understanding financial vulnerability
Financial vulnerability is the risk of facing financial hardship due to inadequate savings or excessive debt. It's crucial to avoid depleting savings if it puts you at risk.
Relying solely on savings to pay off credit card debt can leave you vulnerable, especially if you're in unstable employment or lack an emergency fund.
Without a safety net, unexpected expenses or changes in income can quickly derail your financial stability. By understanding and mitigating financial vulnerability, you can make informed decisions that protect your financial well-being and future prosperity.
Strategies to Boost Up Savings
Start where you are
Start contributing to building your savings with what you can now. Do you have an emergency fund? No, begin there, even if you can only contribute $20 a week. You are working your savings muscle and creating the habit of paying yourself. Start small with what you have and increase it as you can.
What can you reduce or eliminate from your expenses?
It’s time to take a good look at your budget. What are you no longer using? Subscriptions or premium features that you forgot you had. Cancel them for now; you can always add them back if you choose to.
Can you reduce other expenses, like eating out –maybe going out to lunch instead of dinner, or dessert instead of a meal, taking your lunch to work, or cooking a special meal at home instead of going out?
It’s not about deprivation but rather looking at ways to do things you love and continue to progress your repayment goals.
How can you grow your income?
You can increase your earnings, ask for a raise, get a second job, or start a side hustle. Other ways might be selling things you have around your home or clothing you no longer need. The idea is to get rid of stuff you don’t use while keeping what you need and want. One way to increase your income is to make sure you are contributing to your employer's 401k plan at least up to the match- otherwise, that’s free money you are leaving on the table.
Strategies to reduce debt
You have debt and want to pay it off. Let’s look at different ways to reduce and repay your liabilities once and for all. You can take action by implementing the steps described to get you where you want to be.
Make your Debt Pay-Off Plan
Collect all of your statements and total it up! This is the hardest part. You have to face what you owe. Put a date on it. When are you going to be finished paying it all off? Don’t be discouraged; that day will come. Include benchmarks and goals to celebrate along the way. You can determine the frequency of the celebration(s) - it’s your plan!
Choose the debt repayment method that works for you!
Let’s focus on the steps to get your debt repaid: technically, there’s the best method, which is the Math Method. This is where you focus on paying off your highest-interest debt first while paying your minimum balances on all your other liabilities. The problem is that your highest interest rate debt might be your highest balance, which can be demotivating.
The other is the Momentum Method, and this is where you focus on paying your liability with the smallest balance first while making the minimum payments on all of your remaining debts. Once you pay that first balance off, you apply that amount to your second smallest balance and continue until all debts are repaid.
Keep Yourself Accountable
Stay the course and keep yourself accountable for what you said you would do. If you are not hitting your targets, review why you aren’t. Make the necessary adjustments and keep ongoing. Get an accountability partner; this can be your SO or a friend working on similar goals.
Strategies for responsible debt repayment
Debt should be repaid responsibly to maintain good credit health and reduce financial stress. To achieve this:
- Budget effectively to allocate funds for debt repayment.
- Increase income through side hustles or seeking higher-paying opportunities.
- Set achievable repayment goals, such as paying more than the minimum payment.
- Get an accountability partner to stay on track and motivated.
By implementing these strategies, you can navigate the debt repayment process effectively, improve your credit health, and work towards reducing debt.
Balancing short-term needs and long-term goals
Finding the balance between addressing immediate debt concerns and prioritizing long-term financial objectives helps to foster a sense of financial security and peace of mind. While repaying debt is essential, it's also important to save for retirement and other future needs.
Striking a middle ground allows for debt repayment without sacrificing essential savings, ensuring financial stability both now and in the future. By maintaining this balance, individuals can navigate their financial journey with confidence and resilience.
Balancing life saving, and debt
Paying debt, saving, and enjoying life isn’t an all-or-nothing situation. There can be some middle ground.
What about using some of your savings to start you off, reduce your debt, and create momentum to start you going? This can serve as motivation to conquer your remaining debt.
Seeking professional guidance, such as consulting with financial advisors or debt counselors, can provide personalized advice to help you navigate your financial journey effectively.
Debt reduction is all about balance and finding a way to tackle your debt while also taking care of your financial goals and living life.
If you're looking to achieve freedom and peace of mind for yourself or your employees, Your Money Line is here to help your employees create debt pay-off plans, establish savings goals, and to serve as an accountability partner.
