Debt is a major source of stress for many American households. Seeing those negative balances can make you feel like you will never make progress toward your financial goals. As a result, it can be tempting to sacrifice your savings for the sake of paying down debt as fast as possible.
However, throwing all of your money at debt payoff may not be the best strategy for your long-term financial health. We recommend a different, more balanced approach: divide your discretionary income between debt payoff, saving for stability, and saving for adventure.
To track your assets and liabilities, you can download templates to save on your own computer; you also can use a tracing app like Mint or Personal Capital.
- Paying off debt
Part of your money should go toward paying down any debt, including student loans, credit card balances, or medical bills.
Consumer debt has the highest interest rate and should be paid off before any other types of debt. If you have a lot of credit card debt, consider a balance transfer to a zero-interest card, then spend the year seriously working to pay off the total.
For more resources on how to pay down your debt, see these calculators from Bankrate.
Once you’re rid of any consumer debt, you can zero in on lower-interest debt, like student loans. You should be able to allocate any payments above your minimum to a specific loan—pick the ones with the highest interest rates.
Dealing with student debt? See my article about balancing loan payments with other financial goals.
- Saving for stability
It’s important to set aside three to six months of expenses (depending on how stable your job is), so contributing to a stability or emergency savings account is a critical second piece of this approach.
Remember, this money is truly for your long-term stability: do not allow yourself to draw from this savings account except in true emergencies. This money will be important if you ever are out of work, decide to move and look for a new job, or have a big medical bill—and it will give you the ability to run away from a bad job, a bad relationship, or even a bad living situation. Having cash on hand for these types of situations will help keep you out of high-interest consumer debt, potentially saving you lots of money in interest.
- Saving for adventure I find that when people are focused on paying down debt or saving, they still are unlikely to turn down an adventure that costs them money—like traveling to see a friend get married. Without a savings account for this type of opportunity, that cost will end up going onto a credit card, prolonging the debt payoff process.
To avoid this, I advise to save up a “freedom fund” even as they are focused on debt payoff and emergency savings. With some creativity, you can make it easier to save for the things you love while also working toward other financial goals. Perhaps you can funnel cash back from your credit cards into your travel account, or treat the money from your side hustle as a fund for your hobby. It’s important not to stop allowing yourself some joy, even as you work hard to pay off your debts and build up your savings.
Balancing competing financial priorities is a challenge, and it will take time to reach all of your goals. Try thinking about your journey to financial stability as a path to the life you envision for yourself—it may even make personal finance fun.
Kristen Euretig, CFP®, owns Brooklyn Plans, LLC, a financial planning firm dedicated to helping today’s women.
These articles are for informational purposes only and do not constitute tax or financial advice. Individuals should contact their financial professional for assistance.