Save Now, Pay Later: Sensible Debt Reduction Tips
It’s OK. You’re not broke. You are merely living in voluntary simplicity. Or at least that’s what you keep telling yourself. The fact is that getting out of debt and preventing small emergency expenses from ruining your life is tricky. There are several approaches to solving this problem, but the right one for you depends on your debt concerns and your lifestyle.
Most financial experts say you should have 3-6 months of expenses saved up. But–and it’s a big but–you should eliminate debt first. These days, even high-interest certificates of deposit are only about 1 percent APY. By comparison, the interest rates on your credit cards may be 20-24 percent or greater. That’s a huge difference. You should have savings, but you need to get out of debt even more. You may think that paying off the biggest credit card or the one with the highest interest rate is the best place to start. In fact, it’s not. When you are working toward debt reduction, you need to see progress as soon as possible. This means paying off the card with the lowest balance first. Then, once you pay off that card, you can wrap that debt into the card with the next lowest balance.
It may not be practical, depending on your income, your total debt and your ability to pay it off, to have a huge savings account. That said, you need savings for emergencies such as a broken-down car or appliance repair. These expenses are too easy to put on a credit card, which is what landed you in this mess in the first place. Take a hard look at your monthly expenses in relation to your paychecks. See if you can spare even 3-5 percent of your monthly after-tax income to go toward short-term emergency savings. Having a little extra as a cushion makes a big difference.
Most people, you included, want to be debt-free. You can achieve this end by efficient debt reduction and saving extra. That way, you reach your goal without putting yourself at risk.