How to Manage Debt & Build Savings

If you are wondering how to balance paying off debt while setting money aside for your savings, you are not alone. Fortunately, with commitment, planning, and practice, there is a way to do both. Let’s explore how you can take control of your financial future and alleviate the stress of balancing debt repayments and saving for a secure future.

Why Are Savings Important?

Although having debt and savings might take practice and fine-tuning, it’s an essential practice that ensures you have savings set aside for emergencies. You should aim to save and pay off debt, regardless of your earnings. Without savings, you may not be able to pay for emergencies or have anything to fall back on if you lose your main source of income.

Although it may take additional effort to balance your loan payments while also saving, it’s just as important to save as it is to pay down loans. Some of the reasons to start saving include:

• Achieving your future goals: Whether your goal is to own a home, buy a car or retire comfortably, you can only achieve it by paying attention to your savings.
• Giving yourself peace of mind: Unexpected things happen, and knowing you have money to cover emergencies gives you peace of mind. You can relax knowing you can manage unexpected situations like financial emergencies, job loss or illness.
• Providing opportunities: Disciplined saving habits now give you more options later. You might decide to change careers or relocate to a different state, and your savings can help bridge financial costs as you get settled and take advantage of these opportunities.
• Enjoying short-term rewards: Savings can be for the short term. You can save up for a smaller goal, like a down payment for your next car or a nice vacation. Both of which would bring you joy and reward your hard work.

 

Strategies for Building Savings While Paying Off Debt

At first glance, it may seem like you must choose between paying off debt and saving. It is possible to do both. The following strategies can help you meet your current financial responsibilities and plan for the future:

1. Track Your Spending and Stick to a Budget

When it’s time to start paying down your debt, making a budget and tracking your spending is the first step to empowering yourself for the future. First, you need to establish how much money you have available to pay down your debt or save. Follow these simple steps:

• Add up how much you bring home each month, including your salary, additional income from side jobs, and bonuses. This figure is your total monthly income — the amount you have to put toward all your expenses.
• Find out how much you spend on living throughout the month. Add up expenses like rent, groceries, and transportation costs. Calculate an average for costs that change every month, like transportation. This amount is your expenses.
• Subtract your expenses from your income. The amount you have left over is what you have to pay down your debt and put in your savings account every month.

Having a budget can help you monitor your spending and focus on healthier financial habits. The 50/30/20 approach is a simple and popular choice. Take your income after tax and divide it into three categories:

• 50% for nonnegotiable needs, like rent, food, and electricity.
• 30% for things you want, like entertainment and eating away from home.
• 20% for savings and debts.

For example, if you earn a salary of $3,500 a month, you’d ideally spend around $1,750 on your needs, $1,050 on things you want, and $700 on your savings and debt. Of course, your circumstances could change from one month to the next, so you can always reassign money as you need. Just ensure you’re putting something in your savings each month and making at least the minimum loan and debt repayments.

Examine how you spend money and use the 50/30/20 approach as a guideline. Consider how you can cut back if you notice you’re spending more than 30% of your income on wants.

2. Set Financial Goals

The psychology of goal setting is well documented. Setting specific goals increases motivation and performance, so you work harder to achieve them. Instead of saving with no set objective, you have something concrete to work toward.

Think about your savings goals and whether they’re clear. Do you have a specific amount you want to save? How long have you given yourself to achieve that milestone? You can also set goals for managing your debt, like making more than your minimum payment when you get a bonus or tax refund by paying an additional amount each month toward your principal, which helps boost your credit score and can reduce the interest you pay.

3. Automate Your Savings

Have you ever meant to put money in your savings account and forgotten all about it? By the time you remember, you’ve spent the money, and it’s too late.

Treat your saving as an ongoing expense instead of leaving it up to chance — set up a direct deposit or automatic transfer into your savings account on payday and pay yourself first! Whether you remember or not, there will always be money going into your savings.

Your automatic savings aren’t set in stone. You can always change the amount you send to your savings account each month. Any amount is a positive move toward building up your savings.

4. Put Your Money in the Right Savings Account

While you can put your money in any savings account, a high-yield account has a higher interest rate, so your money will grow faster. Discuss your savings account options with us, and we will help you choose the best savings vehicle for your needs.

5. Prioritize High-Interest Debt

Reducing your interest can seem like a small change, but it can save you money in the long term. You can start reducing your interest by paying the debts with the highest interest rates first.

If you’re one of the many people who wonder whether it makes sense to pay off loans or invest, talking with a certified financial planner can help you weigh your options and decide what will work best for achieving your long-term goals.

6. Consolidate Your Loans

If you have multiple debts, consolidation combines them into one loan. Having a single payment to keep track of is more convenient than managing multiple payments. Consolidating your loans can also lower your total monthly payments and can lower your total interest expense. Depending on your circumstances, you can opt to make repayments over a longer period or pay your debt off more quickly.

8. Reach Out

Learning to balance savings and debt takes time and practice, but don’t be afraid to reach out to our Trust and Wealth Management teams for help. Our dedicated teams will help you explore options that fit your unique needs and help you formulate a plan to achieve your financial goals.

Let Mid Penn Bank Help You on Your Journey to Financial Health

Financial health can be a moving target, especially when repaying debt and trying to build your savings. The knowledgeable and caring team at Mid Penn Bank can help you manage your finances, cover your expenses, and save for the future. While it might take some practice, we’ll be with you every step of the way. As a community bank, we see the people beyond the numbers.

Contact us and start building your financial health today.

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