In investing and saving your savings rate matters. That is how much of a percentage of your income is going to savings or investing. Most wealthy people have a savings rate of 15% or more. So when you consider what will help you pay down your debt think of the same thing. How much of a percentage of your income is going to debt and the higher you can make it by earning more income or spending less money, the sooner you will be out of debt.
“Depending on the circumstances, debt may be acceptable for the following expenses:
- A modest, affordable home
- Reasonable educational expenses that will lead to better work
- Modest, basic transportation (only if necessary)
You should likely avoid going into debt for items other than these. Instead, save up for expenses.” -Source
Back in the track budget episode, we could see how the average American as well as myself spend money.
So for most you should minimize your spending in these 3 categories:
- Then onto your next biggest categories
Seriously stop now and rethink where you live, what you drive and why you eat out so much. You could think outside the box and save so much here. Here are just some of my ideas.
You could get roommates, move back into your parents home for just 6 months, get a trailer home, downsize… Get creative in order to save some cash for what you actually want.
Triple A did a great study showing you the true cost of your car.
Could you go down to a cheaper vehicle type, 1 car, car pool or go down to no car?
Do meal planning and make it all yourself (I have tons of great ideas in my bonus episode spend less money.)
Here is why people use credit cards. 50% of people are using their credit cards for bad reasons and the rest aren’t much better.
“The cost of debt: The average household with credit card debt pays a total of $1,292 in credit card interest per year…” -Source
You you can pay yourself an extra $1,292 per year just by not going into debt on credit cards.
I took the same data from NertWallet and created this.
“Even if you have debt, make only the minimum required debt payment until you have built a one-month emergency fund.” - Source
Use avalanche (Highest amount owed to lowest) or snowball (Lowest amount owed to highest) method to pay down 1 consumer debtor as fast as you can while paying the minimum payment on everything else.
Debt Snowball Calculator
Until your consumer debt like credit card debt is paid off focus on those debts then student loan and then your home. You should build up your 3-6 month emergency fund before hitting your student loan or home debt hard. And if you are wondering, you should invest at least up to your match in the company sponsored retirement plan before hitting your student loan or home debt hard.
What to do in a financial crisis
“You may need to cut unnecessary expenses for a time, if possible. focus on food, shelter, utilities, and necessary transportation before paying other expenses.”
- Temporarily delay or reduce payments.
- Extend or permanently modify the terms of the loan.
Warning - debt consolidation
Watch out for debt consolidation. They trick you with that lower monthly payment rate and interest rate. Often they have hidden fees and extend the debt payoff date not really reducing the amount you owe.
Credit card loan balance transfer
I personally used a credit card loan balance transfer with 0 interest for 12 or more months. You can use a site like Magnify Money to compare your best options. Watch out for fees on both your existing and new credit card when transferring.
I only did this because I was already making payments and I thought why not remove any need for interest payments. You should not transfer from a lower interest rate credit card to a higher ever.
Debit cards & savings accounts with benefits
Because I still want benefits but without the ability to go into debt I’m switching to an Aspiration Debit card. 1% cash back on debit purchases and 2% APY on savings account and free ATM withdrawals worldwide. That is about as good as it gets for low balance accounts. The savings account is where I will place my emergency fund.
I used Magnify Money to compare other savings accounts and in the end I struck a balance between APY and easy of adding/taking away money.
Student Loan Debt
With the Chipper App you can do several great things for your loan.
- Compare and save by switching your student loans
- Pay down your debt faster with round ups (Average $54 per month)
- Allow others to track and contribute you your student loans