How to Pay Off Debt and Save

Getting Off the Struggle Bus

The tension between paying bills and getting ahead can feel overwhelming sometimes. Saving for future purchases, trips and emergencies may seem so out of reach. That tension comes from overextending your resources and commitments. It’s time to break the cycle. You can pay off debt and save at the same time.

Changing behaviors and financial habits takes focus. First you need to choose the future you want. Visualize the life you want to enjoy in two or three years from today. Write it down. Next, be prepared to become hyper focused on reaching your goal. Just like training for a mini marathon, you will have metrics to track and a final date on your calendar.

Do it for you!

Identify the Culprit

Take a close look at your monthly obligations. If you use excel, create a spreadsheet for your bills, expenses, deductions and income. I started with graph paper years ago and it’s really inspiring to see how far I’ve come. Paper format is great if you like to doodle, check things off or make notes about what you did or accomplished. Just one month per page.

Next to each item, choose a category/purpose and write it down. Just like managing your time, this will help you see where the bulk of your resources are going. Data is your friend. The more details you can understand about your current cash-flow and spending habits will help you pay off debt and save.

Now let’s run a few calculations. First, calculate the total minimum monthly payment on all of your bills/deductions. A healthy manageable amount is anything below 80% of your monthly gross income – before taxes, insurance or deductions. Second, calculate the percentage of your monthly gross income for each item and write it next to the dollar amount for each.

Example: Car payment $252 (category: transportation) divided by $3,000 (monthly gross income) = 8.4%

Have you found the culprit? Does any category seem out of line with your dreams and values? How much of your pie are you giving away every single month? Are you stuck with the crumbs?

One more calculation to help you prioritize where to focus first. Add up each item that is a debt payment – monthly bill for mortgage, student loan, credit cards, car loans, personal loans or medical payments. This will give you your total monthly debt commitment. Divide your total debt by your total monthly gross income (Example: $1200 minimum debt payment divided by $3000 = 40%). This is your Debt to Income Ratio.

Financial Strength: 35% Debt-to-Income Ratio or lower

Crafting Your Roadmap to Pay Off Debt

Taking on debt is a convenient way to access a sum of money now and pay it off over time. Sometimes it can be the only option at the time. It’s a wager against future income. But, here’s the thing – you shouldn’t borrow money without a plan and a clear purpose.

Now that you have calculated your monthly commitments and Debt-to-Income Ratio, let’s talk strategy. First, circle the two highest monthly debt payments you have. Next, circle the two debts with the lowest balances. Transfer these four items to a new spreadsheet, including the minimum monthly payment, interest rate and total balance due.

The quickest way to increase cash-flow and improve financial strength is to eliminate the largest monthly payment you currently have. Calculate a payment payoff for each of the four items you have. Choose one to focus on first – either the highest interest rate, lowest balance or largest payment. How much do you need to add to the monthly payment to pay off your debt as soon as possible?

Now that you have an amount and a payoff date, let’s look at some options to get you there:

• Look for discretionary spending that could be diverted to meet your goal ( cut back on eating out, dry cleaning, pet services, etc)
• Find items to sell online or garage sale
• Fill a need in your community – repairs, yard work, child care, etc.
• Take on a part-time gig
• Offer a class online or do contract work – check out skillshare, fiverr, upwork or others
• Get a roommate, drive or deliver using your car
• Think long term – is it time to move, find a new career or opportunity?

Try a few and see how quickly you can reach your goals. Once you get started, build in good habits from the beginning. Save at least 10% of your additional income. Set it aside in an account that you can add to and watch it grow! Put the rest towards paying down and paying off the four items you choose.

Sometimes it can be incredibly challenging to stay focused and committed to building a life you love. If you are feeling overwhelmed and looking for support, check out Financial Wellness 101 – The Ultimate Financial Handbook for Young Professionals. We also offer 1:1 Financial Coaching to help you create a clear roadmap to improve financial wellness.