Many of us struggle with debt on a daily basis without making much progress. In fact, I recently highlighted that 50% of Americans have maxed out credit cards!
With that being said, if you finally have extra money at the end of the month, I suggest you hold onto it until you have two important things in place. Paying down debt may seem like a great idea, but it could turn out to be the wrong move if you do not have a budget and emergency savings in place.
A Plan For Your Money Is More Important Than Paying Off Debt
If you currently do not have a budget, you should not spend any money until you have one in place. For as long as I can remember, budgets have received a bad rap. If you talk to someone who actually budgets successfully, they will tell you how empowering and freeing a budget can be. A budget is a plan that gives you the ability to tell your money where to go rather than letting your money control you.
Despite popular opinion, living on a budget does not mean you can no longer enjoy life. In reality, a budget gives you the power to spend your money on what you truly value in life rather than wasting it out of habit.
There are unlimited examples of people who make an average salary and are able to get out of debt and build wealth. With a proper budget, you can not only make a plan to eliminate your debt, but you can also figure out how to pay for all those bucket list items you dream about.
You Are Your Best Insurance Policy
Right now, your credit cards may be your insurance policy for when life happens. Rather than relying upon a bank who is willing to charge you 16% or more to borrow money in an emergency, you can be your own insurance policy.
If you start a budget as mentioned above, you can start to delegate a certain amount of money each month to go into an emergency savings account. This account should be fully funded with $1,500 – $2,000 before you start paying down debt. The reason for this is to guard against your car breaking down or other financial issues going back on a credit card.
If you do not have any money in a savings account and you are forced to put money back on a credit card, you are moving backward. If you have emergency savings and an unexpected money issue happens, you can pull cash out without having to increase your debt.
With this method, you are your own bank and you can guard yourself against going further into debt.
How To Fund Your Emergency Savings Quickly
If you are living paycheck to paycheck, the idea of funding an emergency savings account with $1,500 – $2,000 may seem impossible. However, if you create a budget and review your spending you will be able to clearly see where you are wasting money. By cutting back on the wasteful spending, you can direct this money to your emergency savings.
In addition to cutting back your spending, you can also increase your income through many different avenues. You can pick up a profitable side gig from your couch, or another part-time job to quickly meet your goal.
If a part-time job will not work in your current situation, you can have a yard sale and start selling things you don’t use or can live without. Most of us have closets full of stuff we don’t use or need anymore. Start organizing your closets and find what you can post for sale online and what you can sell from your driveway.
The Debt Payoff Balance
As you probably have noticed, credit card balances are difficult to pay off due to the high-interest rates and the compounding debt. If you are struggling with debt, the emergency savings will protect you from adding more fuel to your debt fire.
In the event you are forced to take money from your emergency savings, stop paying extra towards your debt until you replenish your fund. When the savings account is full again, go back to attacking your debt.
By using this formula, you can avoid going further into debt and pay off your remaining balances that much faster.
I Have A Budget And Emergency Savings – Now What?
When you have these two essential items in place, you can start attacking your debt! The two main debt payoff methods that are constantly debated are the Debt Avalanche Method and the Debt Snowball Method. Either method will pay off your debt quickly, but each has its own benefits. Depending on your personality, one debt payoff method may be better than the other.
Even with their differences, they both recommend paying off debt in the same manner:
- Pay the minimum on all of your debts except the one you want to pay off first
- Put all of your extra money towards one debt at a time
The major dispute revolves around which debt should be attacked first and in what order. Which is better? Well, would you rather drive a BMW or Mercedes? Ask two people which is better and they’ll give you a different answer. It all comes down to preferences.
Paying off debt can be scary but if you have made the decision to break free from it, make sure you set yourself up for success! Make sure you have a budget and emergency savings in place before you tackle that debt. Without these two items, you’re bound to end up back in debt again. It’s also important to understand the different between being rich vs wealthy. It will help you stay focused on your goal.
It’s time you took your life back and took control of your money. You owe it to yourself!