Let’s be completely honest. When entering adulthood, it’s always a game of this or that — especially when it comes to money.
Should you buy that car or not? Make payments towards your credit card (You should!) or save for vacation? Splurge on dinner or suffer and eat that peanut butter sandwich? Should you start padding your savings or start paying down your debt?
It’s an everyday struggle. And although we all might have big dreams but not the financial backing to make them come true, that doesn’t mean the way we manage money doesn’t matter. Trust me, it does.
So, the question remains — Should you start cushioning your savings or start paying off your debt?
Certified financial planner and founder of Brooklyn Plans, LLC Kristen Euretig says that although it depends on the kind of debt you have (for instance credit card verses student loans) it’s best to do both at the same time.
“I think of debt retainment as a stool with three legs. In order for it to be balanced, you have to do all three. Those include paying off debt, saving for emergencies and saving for your freedom fund,” says Euretig, “The thing about getting out of debt is to stop getting into it. It has to be coddled with savings. You can’t pay off and stay out of debt without saving for yourself.”
Simply put — save first. Below we give you a step-by-step process on how to save your money before or while you’re paying off debt.
Don’t Be Ashamed
It’s vital to address the feelings that come with tackling or dealing with debt, regardless of it being a credit card or student loans. First things first, don’t be ashamed. Whether you were in college using your card irresponsibly or were being negligent toward your payments, you must acknowledge the financial mistakes you’ve made and look to the future on how you can make things right.
Euretig emphasizes that you must have a mindset of an athlete when dealing with debt.
“Ok, you lost the last match, but you’re going to keep training and playing. You don’t give up and you can’t dwell on the losses, [like] the 401K you never contributed to,” says Euretig, “That was the last game. What’s the next game? We spend a lot of time dwelling on the past and bring that baggage into the present. Try to have a fresh perspective. There’s no athlete that wins 100 percent of the time. They have to go to the next plan and keep going.”
Do a survey of where you are financially and how you can better yourself. You should even check your credit score.
Break The Cycle
Now that you have a change of perspective, it’s time to put in the work. Old habits die hard, yes, we know, but that doesn’t mean they can’t die. One of the many reasons people use credit cards is the grace period that comes with one when making purchases as opposed to using cash or a debit card. When you make a purchase, you have time to make payments back in installments instead of getting the amount withdrawn in that instant.
In order to get out of debt, you might need to stop using cards at all. Euretig emphasized in order to break that cycle of relying on your credit cards, you must start saving. Start by having an emergency fund, which should have three to six months of your income, that way if an emergency occurs, you won’t rely on your credit cards but your emergency savings instead.
The emergency fund or regular savings will give you breathing room while you’re paying down debt.
Figure Out How Much You Owe
In personal finance, you’re always being introduced to new acronyms. There’s CFP (certified financial planner) and APY (annual percentage yield). But when it comes to credit cards, the most important one is APR, annual percentage rate.
APR is the interest you’re being charged for borrowing money. So your monthly payments will consist of APR and your monthly balance. According to The Street, a good APR is around 10 percent, while the national average is 16.56 percent, per Bankrate. High APRs are generally given to those who have a low credit score of 650 and less.
If you have numerous credit cards, you can start by paying off the card with the smallest balance. Though the APR is important, you want to try to knock out as much of debt as possible in a reasonable time, according to Credit. Euretig believes that you want to pay off the card that’s hurting you the most.
Expand and Grow
Once you’ve finished paying off your debt and have your emergency savings established, you can officially start expanding your financial wings and start creating other funds.
Euretig stresses why everyone should have a freedom fund, which is solely for your freedom and enjoyment. “[You’re] able to focus your energy on things you like to do like traveling or classes you want to take. And the money is there for that and you don’t have to feel guilty about it.”
Set goals on activities you want to do during the latter half of the year and see how you can create financial goals to help you do so without neglecting your current bills. Just remember to give each dollar a responsibility to serve and better your life.