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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.

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