How am I Supposed to Save when I have all this Debt?
Your monthly credit card statements arrived in the mail and they read something like this:
Total balance: Too much to even think about
Minimum payment: Your left arm AND firstborn
Due date: Overdue
Okay, let’s be realistic here. Most of us have some sort of debt, whether it’s nasty credit card debt, a student loan or a mortgage. So how on earth are you going to pay off your debts AND save money at the same time? As impossible as it sounds, it can be done.
Classify Your Spending
The first thing you need to do is track your expenses for 2-3 months. In order to do this effectively, you must be honest. Keep track of absolutely everything, no matter how small. Divide them into three sections: needs, wants and savings.
No more than 50% of your income after tax should go toward your NEEDS.
The Big Ones:
- Car payments
- Utility bills
- Student loans
- Gym memberships
No more than 30% of your income should go toward your WANTS.
- Dining in restaurants
- Impulse buys
- Takeout coffee
- Buying a lunch instead of packing one
At least 20% of your income should go toward SAVINGS.
The Secret to Saving
Right now you’re probably thinking that this is next to impossible. I mean, most weeks it’s difficult to muster up enough for gas. Just where is all your money going? After your 2-3 month assessment, you’ll have a really good idea of where it’s going. All those coffees and magazines add up, don’t they?
Here’s a little secret: Balancing your budget is EASY. Just make weekly payments.
Right. I know. Your bank doesn’t send you a weekly bill, and even if you ask, they won’t. But that doesn’t mean that you can’t pay them weekly. Seriously, trust us. It will make your financial burden so much lighter.
Let’s use a fictitious monthly budget as an example.
Weekly income: $800, Monthly income: $3,430 (approximately)
Monthly rent: $500
Student loan: $250
Travel expenses: $200
Car payment: $225
NEEDS: $1490 (43%)
WANTS: $1029 or approximately $250 per week (30%)
SAVINGS: $686 (20%)
LEFTOVER $: $240 (7%)
By controlling the amount of money you spend on WANTS, you can put more toward your debt and savings. By paying weekly, rather than monthly, not only do you minimize the fear of sudden month-end expenses, you pay more toward your debt than you would if you just paid monthly.
How To Do It
Here’s what you do: Take the amount you currently owe in credit card debt. Let’s say you owe $1200 and you want to pay it off in 6 months. Divide the amount you’d pay monthly, say $200, into 4 weekly $50 payments. Since there are 26 weeks in 6 months, you actually end up paying $1300, rather than the $1200 you owe. Once the debt is paid off, you can actually start putting that extra money into savings.
So the best way to take control of debt while putting money away for savings is to first get a handle on your expenses and then put a weekly payment plan into action. If you follow this simple advice, here’s how your credit card bill will soon look:
Total balance: ABSOLUTELY NOTHING!
Minimum Payment Due: Go have some fun. You deserve it.
Due Date: Ummm, never.