Paying Off Debt? Start Here

Part of prudently managing debt is making sure you have a plan to repay what you borrow. Of course, any plan starts with a solid grasp of your budget and a full emergency fund! While it may seem counterproductive to begin with saving before paying down debt, let’s discuss why these two planks make the best foundation. 

Start with a budget

It’s not enough to track expenses. That’s not a budget; that’s a list. An effective budget provides insight into your household’s relationship with money! Specifically, the money you work so hard to earn.

As for debt repayment, use your budget to identify areas where you can create additional cash savings. That way, you can make payments above the minimums as often as possible. In addition, any extra payments help reduce the repayment period, which cuts down on the cumulative interest. Use your budget to identify your monthly expense figure. That number is crucial because it will serve as the foundation for your emergency fund.

Build your emergency fund

As the name implies, an emergency fund is a savings account you use when you need cash unexpectedly. Your monthly expense number is the starting point. You want to have three months of your monthly expense figure in cash. If you spend $10,000 per month, you need $30,000 in the emergency fund. Having an emergency fund can hedge against having to go into more debt in case of an emergency. It allows you to be prepared for the unexpected and avoid having an emergency set you off track financially.

You may wonder how using a budget and having an emergency fund helps you pay down debt. Using your budget and emergency fund to springboard past debt repayment and into building up wealth allows you to maximize your financial situation and prepare for the future! Imagine adding $1,000 a month to your retirement account or your child’s college fund instead of paying back your lender. Or borrowing money for a vacation only to use the cash you accumulated ahead of time to pay it off immediately!

If you’re struggling to make progress on your emergency fund or can’t quite get your budget to work, schedule some time with your advisor.