How to Save Money While Managing High Debt
Managing high debt while trying to save money can feel like an impossible balancing act. Many people face the question: “How can I pay off my debts and still save for the future?” It’s easy to get overwhelmed, especially when it seems like every penny is either going toward bills or paying down loans.
But here’s the good news: with the right strategies, you don’t have to choose between saving and debt repayment. In this article, we’ll explore practical, expert-backed solutions to help you achieve both goals simultaneously. Please stay with Aseemoon.
Understanding and Acknowledging the Challenge
- Mindset Shift: Personal finance expert Ramit Sethi, author of “I Will Teach You to Be Rich,” suggests that instead of viewing debt and saving as competing priorities, change your mindset. Start thinking of managing your money as a way to “design your rich life.” This mindset will help you feel empowered, even when managing debt.
- Action Step: Write down what a “rich life” means to you—whether it’s freedom from financial anxiety, being able to take a vacation, or owning a home. This vision will help you stay motivated.
Budgeting that Prioritizes Both Saving and Debt Repayment
- 50/30/20 Rule: Adopt the 50/30/20 budgeting rule mentioned by Elizabeth Warren, where 50% of your income goes to essentials, 30% to wants, and 20% to debt repayment and savings. Adjust this ratio based on your debt load (e.g., reduce wants to 20% and allocate more to debt and savings).
- Action Step: Use a budgeting app like YNAB (You Need A Budget) or Mint to categorize your spending and automatically allocate a portion to savings and debt.
Expert Insight: Dave Ramsey, a well-known financial guru, recommends living on a tight budget if you’re in debt. His “Every Dollar” budgeting method ensures every dollar has a purpose, whether it’s for debt repayment, saving, or necessities.
Build a Small Emergency Fund First
- Small, Attainable Fund: Dave Ramsey insists that even while managing high debt, you need a small emergency fund of $1,000 to cover unexpected expenses, which prevents further debt accumulation.
- Action Step: Set up an automatic transfer of a fixed amount (as low as $10-$20 a week) to a separate savings account that is not linked to your debit card.
Expert Insight: Suze Orman, another financial expert, suggests that people set up their emergency fund in an online bank where it’s slightly harder to access, reducing the temptation to dip into it.
Negotiate with Creditors to Lower Interest Rates
- Lower Interest Rates: Call your creditors and ask for a reduction in interest rates or negotiate new repayment terms. According to Jean Chatzky, financial editor of NBC’s Today Show, many creditors are willing to work with you if you show a history of consistent payments.
- Action Step: Before you call, do your homework. Check your credit score, and if it’s improved since you took on the debt, use that as leverage. Consider consolidating high-interest debts with a lower-interest loan or a 0% balance transfer credit card.
Expert Insight: Ramit Sethi emphasizes the power of negotiation, stating that many people simply don’t ask for better terms. His advice: be confident, persistent, and prepared when negotiating lower interest rates.
Cut Unnecessary Costs Without Sacrificing Quality of Life
- Smart Cutting: Clark Howard, a financial expert, advises that cutting down on “invisible” expenses—like subscription services you don’t use or eating out frequently—can save you hundreds of dollars a month.
- Action Step: Go through your bank statements and identify recurring charges. Cancel anything you aren’t using, and try meal prepping at home to avoid costly takeout.
Expert Insight: David Bach, author of “The Latte Factor,” explains that small, everyday expenses like a daily coffee or dining out can add up over time. His advice: by brewing coffee at home or bringing your lunch, you could save hundreds annually.
Find Ways to Increase Income and Use It Wisely
- Side Income: In addition to cutting costs, try to increase your income. According to Chris Guillebeau, author of “The $100 Startup,” side hustles are a great way to generate additional income without requiring large upfront investments.
- Action Step: Start a side gig or freelance job—whether it’s tutoring, freelance writing, or selling goods online. Allocate 70% of any side hustle income toward debt repayment and 30% toward savings.
Expert Insight: Grant Sabatier, author of “Financial Freedom,” emphasizes using your free time to build multiple income streams. He advocates turning hobbies into income sources, like selling products or services through platforms like Etsy or Fiverr.
Set Clear Financial Goals to Stay Motivated
- SMART Goals: Make your financial goals SMART: Specific, Measurable, Achievable, Relevant, and Time-bound. Suze Orman recommends setting small, achievable milestones, such as paying off one credit card or saving $500.
- Action Step: Use a goal-tracking app or even a vision board to visualize your goals. Mark your progress visibly to stay motivated.
Expert Insight: Ramit Sethi recommends breaking down larger goals into smaller, more manageable chunks. For instance, if your goal is to save $5,000, break it into smaller $1,000 goals. Celebrate each milestone.
Focus on Long-Term Lifestyle Changes
- Sustainable Habits: According to Vicki Robin, co-author of “Your Money or Your Life,” it’s crucial to reassess your spending habits and values. Ask yourself, “Is this purchase aligned with my long-term goals?”
- Action Step: Start by evaluating your recurring expenses and whether they bring real value to your life. Consider downsizing where possible, like reducing your rent by moving to a more affordable place or using public transport to save on car costs.
Expert Insight: Mr. Money Mustache, a prominent financial blogger, advocates for adopting frugality as a lifestyle. He emphasizes that cutting down on excess spending doesn’t mean deprivation but rather focusing on what truly brings happiness.
Conclusion: How to save money and pay off debt at the same time
- Consistency and Patience: As Dave Ramsey often says, “Personal finance is 80% behavior and 20% head knowledge.” The key to financial success is consistency in your efforts and patience to see results.
- Action Step: Set weekly financial check-ins with yourself to review your progress and adjust your budget if needed. Keep tracking your goals and keep your motivation high by focusing on the bigger picture: financial freedom.
- Expert Insight: David Bach also encourages patience, reminding readers that building wealth is a marathon, not a sprint. Small, consistent efforts, like sticking to a budget and saving regularly, are the key to long-term financial success.