Most people have a variety of debts, so if you’re trying to eliminate some, it may be hard to figure out which creditor to focus on paying off first, especially if you’re also trying to save.
Here are ways to help you erase debt while socking funds away for an emergency or long-term goal.
Pay Down High-Interest Credit Card Balances
Credit cards sure make it easy and convenient to run up a high balance. And, once that happens, they can be challenging to pay off. If you’re just making minimum payments, it’s going to take much longer to clear up the balance because you’re paying a good chunk on interest. That will also increase your costs. Do whatever you can to pay more than the minimum each month.
One way to get out of debt and save is to stop financing purchases with your credit card. Oftentimes, doing so can double the cost of that purchase. For instance, if you were to put a $2,000 flat screen television on a card with a 15% interest rate, and you only make minimum payments, you would be paying for the original debt for more than 17 years and spend more than 2,500 in interest.
However, if you are the type to pay off your whole credit card balance monthly, perhaps you should consider getting a cash-back rewards card. Using that card can help you achieve your financial goals.
Also Read: 8 Ways to Make Your Finances Automatic
You should try to tackle this debt next, since private student loans generally have higher interest rates than government student loans. These range between 5% and 14% compared with 2.75% for government undergraduate loans.
As of now, you can deduct up to $2,500 annually in student loan interest, but only if you are a single filer earning less than $85,000 a year, or less than $170,000 for married filers. You may want to consult with a financial planner to make sure you’re on the right path.
Pay Minimum On Other Loans
Car loans, mortgages, and government student loans carry lower interest rates, so you can pay the minimum on these debts while trying to save money. There may even be tax benefits.
If you have federal student loans, you may be eligible for repayment plans based on your income, or for public service loan forgiveness plans. Consider refinancing your loan to save money if you don’t qualify for a forgiveness program.
Build An Emergency Fund
You’ll also need to squirrel away an emergency fund so you don’t go into debt if it becomes necessary to cover an expensive unexpected event. A Bankrate survey found 60% of U.S. households have insufficient funds to cover a $1,000 emergency.
One-third of respondents said they’d have to borrow the money. This means an unanticipated expense could plunge you right back into debt. Experts recommend keeping enough to cover at least three to six months of your household expenses in liquid reserves.
Keep It Up
Paying off debt is important, but it can be hard to save when a good-sized chunk of your income must be apportioned to debt repayment. That’s why it’s vital to have a plan for getting out of debt Rather than having to deal with a collection agency.
Working that plan can save you money in interest and, at length, help you save more. Now that you know how to get out of debt and save, you’re well on you way to reaching your financial goals.