Similar here I’m working extremely hard to pay off $85,000 in debt despite receiving a meager entry-level salary a few years after graduating. Saving money is challenging, to put it mildly.
I was sick of constantly being in debt, living paycheck to paycheck, and barely making any progress in paying it off while sending in hundreds of dollars each month. I devised a step-by-step plan to accomplish both since I was aware that I needed to save money and pay off debt more quickly.
The plan is working, which surprised me because I wasn’t sure I could stick to it. I have entirely broken free from the cycle of living paycheck to paycheck since I began following this technique, and I have more money in savings than ever. This is what I did.
Step 1: Save for a month’s worth of expenses
Making sure you have money today is the first step in ending the debt cycle.
I didn’t have any savings when I started, and I had no idea where my money was going. I successfully created a budget that enabled me to save money each month until I had one month’s worth of expenses set aside.
Thanks to this savings account, I now start each month with all the money I require already in the bank. I build up my savings as I go through each month to cover my expenses. By the 15th or 20th of every month, I can usually cover all of my costs for the next month.
I couldn’t make progress on my existing income by myself. While my spouse obtained a delightful second job hosting pub trivia on Saturday nights, I concentrated on building lucrative side businesses like freelance writing and blogging.
The only way to advance in life if your income is only sufficient to meet your current needs (or perhaps even that), is to discover a means to increase your income.
I could concentrate on the following phase after I had enough money saved to cover one month’s worth of living expenses.
Step 2: Resolve your credit card debt
Credit card debt is one of the most expensive types of debt there is, and the interest alone might cost you hundreds of dollars. Make getting rid of it a top priority.
By the 15th or 20th, when I had saved enough for the following month, I applied my entire remaining monthly paycheck to my credit card bills. I had a credit card amount of around $2,500 when I started, but I paid it off entirely in a few of months.
Step 3: Put aside two more months’ worth of living expenses.
It will take me a while to pay off the remainder of my $85k debt, so I want to be sure I’m ready for any emergencies that may arise in the meanwhile.
I’m trying to raise my emergency reserves to cover three months’ worth of living expenses. We don’t have any children, are young, healthy, and soon won’t have a mortgage payment to make. Since we have few financial obligations, we are content with our current level of savings. We will establish a higher minimum amount for our emergency savings when we take on additional commitments in the future, such as a second property, children, or a significant move.
I’m around $500 away from my $8,000 goal, and once I reach it, I’ll move on to the next phase.
Step 4: Pay Off Any Outstanding Debt
Step four involves paying down any outstanding debt and increasing minimum payments if the savings account objective has been reached. It’s time to focus on repaying the remaining debt now that you have enough money in savings to cover most everyday financial emergencies.
Continue to pay the bills for the following month in advance at this stage, and after the quota has been reached, use the additional money to pay off all other debt.
The remainder of my debt will be paid off using the debt avalanche strategy. My strategy is to arrange my loans according to interest rate, from highest to lowest, and pay off the most expensive bill first.
I will apply any excess funds to the loan with the highest interest rate until it is paid off. Then, until the next-highest obligation is paid off (in addition to the minimum payment), those payments will be applied to that debt. This process will continue endlessly until all debts are paid off in full. The important thing is to keep paying at least the same amount each month, not less, as you pay off each loan.
I’ll shorten the amount of time it takes me to pay off my remaining debt by doing this, and I’ll also save paying thousands of dollars in interest.
Fifth Step: Build a Six-Month Emergency Fund
I’ll be entirely debt-free by now! But it’s not yet time to give up.
At the beginning of each month, I’ll have have three months’ worth of living expenditures in the bank, which should cover most emergencies. However, I need a little bit more security than that. In my 29 years of life, if I’ve learned anything, it’s that when things go wrong, they go wrong very badly.
I want to have an emergency fund that can last me up to six months and should guard me against a sudden loss of income or a medical emergency. By maintaining a six-month reserve in my emergency fund, I’ll have enough to tide me over until this policy begins paying benefits, which typically begin after several months. A self-funded short-term disability insurance coverage will replace my savings account.
Start Living Debt-Free Today
It’s challenging to increase savings while paying off debt. To accomplish both goals, you must have a strategy that is specifically designed for your circumstances. The most important part of this strategy, which I quickly figured out, is the requirement that you adhere to your family budget, which you should do anyhow. A life free of debt and cash in the bank is something I, or you, can achieve with foresight and deliberate financial action.