Digging out of Debt

Digging out of Debt is the Beginning of Building your Savings

Financial planners often point out that getting out of high-interest debt is in itself a substantial investment-hence the standard advice that if you have money in savings you should use it to pay down expensive credit-card balances, which cost more in interest than your savings earns.

But what can get lost in the middle between advice on reducing debt and advice on building savings and investments is that the two financial endeavors can, and sometimes should, go together.

Cut Down Your Debt

You don't have to be near bankruptcy to feel the pinch from too-large monthly credit payments. Or perhaps you don't even feel the pinch, but can think of something that you'd rather do with your money than spend it on interest. Whatever your motive, there are some basic steps you can take in managing your debt to reduce or eliminate it while paying as little interest as possible.

The most important thing to do, whether you owe hundreds or thousands, is to create a list of all of your loans-mortgage, auto loans, credit cards, student loans, etc. Include details about how much you owe, the minimum monthly payment, the gross (for credit cards, the annual) interest rate, and the after-tax interest rate (the gross adjusted for tax deductions on interest from loans such as mortgages or home-equity loans).

First, total the amount you owe so that you can approach your finances realistically-a surprisingly large number of people have no idea what their debt actually is.

Next, prioritize the list so that you are always paying the most money toward the debt with the highest interest rate. Often people are tempted to pay toward the largest balance first, but in fact your goal should be to reduce the amount of interest you pay, and the fastest way to do that is to pay off the highest-interest debt first.

As you pay off each account, shift your resources to the next one on the list. And keep paying the same amount each month, even though you owe less and your minimum payments are shrinking. Remember that minimum payments rarely cover much more than the interest charge for the current billing cycle.

Build Your Savings

The "use your savings to pay your credit cards" rule is not, in fact, universal. In some circumstances it may make sense to keep-or even add to-your savings while paying off high-interest debt.

If you live on a tight budget, for example, and tend to rely on credit cards for emergencies, it might be a better idea to keep a small savings account from which you can withdraw funds to cover unexpected expenses. This way you avoid running up additional credit card debt and the interest that goes with it. One way to get more interest for the money you have saved: look into a money market account, which typically pays higher interest than a standard savings account but still keeps your money liquid should you need it.

In addition, if your employer offers a 401K plan with matching of funds, you should almost always contribute at least as much as the company matches even while trying to reduce your debt. The reason is purely financial: your employer's matching of your contribution significantly increases your return-on-investment, both immediately as it increases the amount in your account and over time as interest on that larger balance compounds over the years. And, tax-deductible plans can get you another bonus by reducing your taxable income in each year. In short, this is one of the few kinds of savings that can earn more for your money than your credit cards charge in interest.

Some people also find it important to set financial goals, including rewards, for themselves as they reduce their debt. Saving toward a meaningful goal like a vacation next summer can sometimes provide the motivation to help you through a period of restrained spending as you pay off those cards. And your vacation will be all the more relaxing because you'll know it's already paid for!

Another trick to motivate yourself to cut back your debt and, eventually, increase your savings involves promising yourself a "raise." Although many advisors recommend that once you pay off your debt you should shift the money that went for your payments directly into savings (on the theory that because you've lived without it, you won't miss it in the future), you might also promise yourself some portion of that money as a "raise." Dividing the newly free cash between savings and your spending budget allows you to enjoy the fruits of your debt-reduction labor immediately while still increasing your nest egg.

Intuit's Quicken Deluxe Makes Budgeting for Both a Snap

Quicken Deluxe offers several planning features to help you manage debt and build savings. The Debt Reduction feature will help you through the process of prioritizing your debts for payment, while the Budget and Savings Goals tools help you plan your spending and squirrel away money for your savings-or your vacation.

Savings Goals can be especially helpful if you occasionally look at your register balance and forget about an upcoming expenditure for which you've been trying to save. By setting up "accounts" within your actual accounts, Savings Goals let you hide money from yourself, specify exactly what the money you've set aside is for, and will also calculate a projected monthly contribution based on an end-date you specify, so you can see what you must tuck away to meet your goal.

You can use Savings Goals to earmark money for anything from a weekend getaway to your next credit card bill. If you are trying to avoid debt, but must use a credit card for travel or business, you can even "deduct" the amount of each charge from your checking account register so you can be sure you'll have the cash to pay the bill in full when it arrives. Or, you can save for your next payment in your Debt Reduction plan.

With Quicken Deluxe, saving and reducing debt do indeed go very well together. Quicken can be purchased directly from Intuit at 1 (800) 4-INTUIT or at software retailers nationwide.

If you liked this you may also like:

• Do You Need Debt Relief?

  Feeling overwhelmed by your debts? Having trouble making ends meet? Unable to get ahead of your credit card debts? A Debt Relief plan may be your solution to getting control of your finances.

• Debt Relief: Myth & Reality

  Debt relief comes in many forms- credit counseling, debt consolidation loans, settlement and even bankruptcy. Each solution will help you get out of debt, but the long term impacts and fees can vary greatly. Understand the myth and reality behind your debt relief options.

• You Asked, We Answered: The Truth About Debt Consolidation Companies

  Regardless of whether you binge on shopping or simply use credit cards to make ends meet, there may come a time when you need a financial intervention to help organize your bills, repay your debt, and improve your finances. For some, debt consolidation is the answer. But before you jump in head first, it's time for a course in Debt Consolidation 101.

• Resolving to Get Out of Debt This Year

  There seems to be a running joke that New Year's resolutions never last. (Why else would we have to keep making them every year?) But if you take the right approach to a resolution such as "getting out of debt", there's no reason you can't be successful. If you've been working to get out of debt and are not happy with your progress, or feel that you are starting to backslide, it's probably time to reassess your budget and fine-tune your strategy. The best way to get started is to: get organized, assess your current situation, develop a strategy that works for you, and make sure your goals are realistic.

• Debt Relief Solutions and how to Avoid Scams

  According to the Federal Reserve, in 2009 U.S. consumer debt stood at nearly $2.5 trillion. That's more than $8,000 of debt for every man, woman, and child in the United States. And although our debt picture has shown marked improvement in 2010 - we're borrowing less and paying down more debt - the U.S. is still considered a nation of overindulgence and overspending. So it's no wonder so many consumers are looking to debt relief companies to help them pay off their bills and get back on track financially.

Begin our online process to see your personalized savings.

Start Now

Back Print