When high-interest credit card debt is eating away at your income, putting aside money for savings is the last thing on your mind. But balancing both debt repayment and savings is an important part of managing your finances for years to come.
“Paying off debt and saving money doesn’t have to be all or nothing,” said Rod Griffin, senior director of public education and advocacy at Experian. “Consumers can and should do both.”
Even if you’re working on paying down debt, building a healthy savings fund can help you avoid adding to that debt. Having an emergency fund reduces the financial burden when the unexpected happens, even if you start with a small amount and save slowly.
Here are some strategies experts recommend to help strike the right balance.
Build emergency savings or pay off debt first?
Debt management is essential to your financial security, but so is planning for the future. While paying down high-interest debt will help you reduce the amount of interest you owe, not having an emergency fund can put you deeper in the red when you have to cover an unexpected expense.
“Regardless of [your] debt amount, it’s critical that you have money set aside for a rainy day,” Griffin said. “Emergencies have a way of popping up at inopportune moments, so having cash on hand is important for weathering those situations.”
There’s no one-size-fits-all answer to building an emergency savings account -- the amount you need for an emergency fund depends on your financial situation. But it’s generally a good idea to have at least three to six months’ worth of expenses saved in an account that’s easily accessible but separate from your primary checking account.
Even if you’re setting aside only a few dollars a month, “that could be the difference between paying off debt and suddenly finding yourself even deeper in debt than when you began,” Griffin added.
Best ways to tackle debt
If high-interest debt restricts your financial flexibility because most of your income goes toward monthly debt payments, you’ll want to tackle that first. “Prioritizing which debt to pay off is a bit of an emotional game no matter what the math says,” said Caitlynn Eldridge, a certified public accountant.
Deal with high-interest and overdue debt
Ideally, you should pay off the debt with the largest interest rate first so that you pay the least amount of interest over time, according to Eldridge.
The average annual percentage yield on a credit card is over 20%, according to Bankrate. If you have high-interest credit cards, it’s important to prioritize this debt before the interest payments spiral out of control.
You should also make sure to tackle overdue debts. If you’re falling behind on your monthly payments, create a plan to settle your debt or call your lender and explain your situation. Missing a monthly payment on a credit card or student loan bill, for example, can hurt your credit score and result in high late fees. Missing a mortgage payment can lead to foreclosure depending on how long your bill is past due.
Look into debt consolidation
If you have more than one type of high-interest debt, such as medical debt, credit card debt or other personal debts, you might consider debt consolidation. A debt consolidation loan can combine multiple debts into a personal loan with one fixed monthly payment. This could help you dodge high-interest charges and secure a lower rate.
You might also consider moving your credit card debt to a balance transfer card with a 0% introductory APR. A balance transfer card won’t erase your debt, but it can help you pay down your balance while avoiding interest for 12 to 24 months. You’ll have to pay your card’s regular APR on the remaining balance once the introductory APR period ends, so make sure you have a debt repayment plan if you decide to go this route.
“Consolidating higher interest debt into a lower interest vehicle is a no-brainer for most people,” said Melissa Shaw, a wealth management advisor at TIAA. “If your debt was caused by a lack of self-control or poor spending habits, you also have to commit to changing your behavior. Otherwise, you will likely create more debt.”
Research other debt repayment strategies
If you’re struggling with where to start, take a close look at your debt and monthly budget so you can realign your priorities and move available funds toward your debt repayment plan. At this point, you can better understand what you can contribute to your emergency fund.
Here are a few suggestions to get started:
Pay more than minimum payments: Carrying a high balance on a credit card can hurt your credit score and bank account. One way to reduce your credit card debt is to pay more than the minimum payment each month. Making the minimum payment keeps you in good standing with your issuer, but paying your balance in full and on time will ensure you never pay interest charges.
Commit to a repayment strategy: Consider a repayment strategy like the avalanche method or snowball method. With the avalanche method, you aim to pay off your most expensive debt first while paying the minimum on all other debts. With the snowball method, you tackle your smallest balance first and keep going until you pay off your highest balance.
Cut some of your monthly bills: Monthly expenses can add up quickly, so look at your bills and see if you can eliminate any unnecessary charges. For example, if you haven’t used a streaming or subscription service in a month or more, cancel it. You can always resubscribe at a later date if you change your mind.
Bring in extra cash: A side hustle can help you make extra money without infringing on your full-time gig. This can include freelancing or watching your friends’ dogs. Having a little extra cash can help supplement your income and chip away at your balance faster.
Everyone’s debt repayment strategy will look different, so focus on setting realistic goals when managing your debt and building savings.
Saving for retirement is still important
You may not be thinking about a retirement plan when paying down debt. But if your job offers a 401(k) employer match program, you could be missing out on free money if you aren’t maximizing your workplace retirement plan.
With a traditional 401(k), your retirement contributions are deducted from your gross income. This means the money comes out of your paycheck before income taxes are deducted. If your company offers a match program, consider taking advantage of that free money (even if you have debt).
“You can’t miss what’s not there, but if you wait to save whatever is left over at the end of the month, you’ll never get started,” said Shaw.
Find a balance that works for your needs
It’s possible to balance saving money and debt reduction, but you need to understand your full financial picture to build a strategy that works for you.
“It is difficult to balance saving money and paying down debt without a plan, and a plan starts with knowing your finances inside and out,” said Griffin. Once you have a clear understanding of what you’re working with, you can make an informed decision, he added. That way you can determine which debt to tackle first and how much you can afford to save.
It’s also OK to shift your priorities as your financial situation evolves. As you pay down your debt, you might be more comfortable saving more. And if you hit a roadblock, you might need to reduce the amount you save. That’s why it’s important to have an emergency fund to fall back on instead of relying on your credit card.
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