That little amount of stashed cash is significant to the success of your debt repayment strategy. An emergency fund will ensure that you don’t seek more loans while repaying your existing debt(s). But how can you save money when trying to get out of debt?
- Make a List of All that You Owe
- Stop Accumulating More Debt
- Create an Emergency Fund
- Withdraw From Your Retirement Fund
- Cash Out Life Insurance Policy
- Select a Debt and Tackle it aggressively
- Separate Your Credit Card Balance Into Manageable Portions
- Switch to Friendlier Deals
- Be Motivated (Forbes.com)
How to Get Out of Debt and Save Money at the Same Time?
Emergency situations can affect your repayment plan, or worse, plunge you further into debt. It takes your attention off your debt thereby hindering the flow. With an emergency fund, or savings, you will not have worry when such emergencies arise.
Make a List of All that You Owe:
A comprehensive list of all that you owe will provide you with a clear picture of your financial situation. List the debts, each creditors, interest rates, deadline, minimum payments, and all-important information that can help you understand the nature of your debts.
With this list, you can then select a debt repayment plan and start reducing the money owed. You can start by repaying the least to gain momentum. Alternatively, you can start by repaying the most important of them all. You can either select from the avalanche or snowball repayment strategy.
Stop Accumulating More Debt:
It will be very unwise of you to incur extra debt while struggling with others. You will be harming yourself by doing that.
You do not fill a bowl with water when trying to empty it. If you want to empty a bowl full of water, you have to cut off all water supply. That is what you do when repaying a debt, you stop taking loans and focus on repaying all that you owe.
Because loans are almost inevitable, there is a huge possibility that you may be tempted to take one when repaying your existing advances. Overcome this temptation and discipline yourself. Trim your expenses to ensure that you have enough cash to take care of yourself and gradually repay all that you owe without adding more debt.
Create an Emergency Fund:
An emergency fund can be likened to a cold drink in a hot day. It offers you that relief when unexpected expenses arise.
Emergencies could be anything from unexpected illness, surgery, a faulty car, heater, etc., and they can deal a massive blow to your dream of financial freedom if you don’t have plans in place to counter their effect.
With an emergency fund, you can easily handle those unexpected expenses when they arise without having them jeopardize or interfere with your aim to repay your loan.
The perfect emergency fund is six to 12 months’ worth of living expenses, but you can simply begin by saving up a minimum of $1,000, or anything you can afford to save.
Withdraw From Your Retirement Fund:
In severe situations, you may have to pull out cash from your retirement account to settle what you owe. Be cautious, if you aren’t at least 59 ½, you will be penalized for early withdrawal and you will also encounter extra tax liabilities.
The exact penalty you will face hinges on the retirement account you took money from and how the money were spent, but the standard penalty for early withdrawal remains 10% tax. Also, when it is time to retire, your savings will reduce, not just from the withdrawn cash, but from interest, dividend, including capital gains you could have earned with the cash.
You can also borrow from work-sponsored retirement plans, like a 401(k). However, this tactic is quite risky. If you quit your job, you will be required to repay the loan in a duration that could aggravate your financial situation.
Cash Out Life Insurance Policy:
You may have gathered some money in your whole or universal life insurance policy that you can use to reduce the money you owe. Like utilizing retirement funds, this is also a dicey move that can is followed by tax consequences. Lending cash from your insurance policy is another alternative but it may have an effect on the death benefits your beneficiaries are entitled.
Select a Debt and Tackle it aggressively:
Some individuals raise all their minimum payments by a little margin, but by so doing, your payments reduces by a little amount monthly. You can make substantial progress by making a huge payment to only one of your accounts every month until you have repaid the advance. In the meantime, make the minimum payment on the other accounts. The same principle applies to other debt, and the next, until you have paid all completely.
With this tactic, you should be able to repay your loan and save a bit of cash. It doesn’t matter how little it is. A little drop of water they say makes an ocean.
If you need help on the method to adopt in tackling your debt, you can try credit counselling.
Separate Your Credit Card Balance Into Manageable Portions:
A big credit card balance can be very intimidating which is why you need to break it up to little bits. However, if you have many cards, start with settling the smallest.
By so doing, the repayment process becomes a bit easier in smaller amounts. Owing $20,000 in credit card debt can be intimidating to the mid. Rather, imagine owing four diverse portion of $5,000 each.
Of course, it doesn’t reduce what you owe in anyway but the little wins can enhance your confidence and help you save some cash even while dealing with your advances.
Switch to Friendlier Deals:
Changing utility suppliers remains one of the simplest ways to save cash on your household bills.
This act has become very common in most households. By switching from a supplier that offer a costly service, to one that offer an affordable one, you will save a substantial amount of money on the long run. You can then use this cash to repay your debt and save a little portion should an emergency arise.
You can use price comparison websites to switch. These sites can show you what the other suppliers offer. You can switch your mobile, broadband and TV package to save cash.
Be Motivated (Forbes.com):
To you, this may look like a throwaway tip, but it is one of the most significant. Repaying a loan is not a walk in the park. You have to change your lifestyle, monitor how you spend, make the necessary monthly payments to avoid late fees or foreclosure, etc. It takes commitment and discipline to settle all you that owe and fix your credit.
While you shouldn’t create a plan that is impossible to stick to, you will have to make some difficult choices. If you are used to partying on weekends, or you love going on vacations, you will have to stop. At this moment, it is crucial that you give up some of those extravagant lifestyles to get what currently looks like the abstract state of being free from your creditors.
To get through this ordeal, you will need the best motivation you can muster. You can make a visual reminder of your aim, like a photograph of the type of car you wish to purchase, or the country you want to visit when you can afford it. Place the photograph in a visible place, somewhere you will be able to see it each day so that it serves as a constant reminder and a motivator.
Why Should You Save When Repaying Your Loan?
There are many things you ought to consider when repaying your loan, and one of them is your savings. It offers you the perfect backup when emergency strikes. Emergency like a leaking roof can derail your repayment plan and increase your debt. You definitely would not want this to happen.
With some reserved cash, you will be able to handle emergencies when they arise and still focus on repaying the money you owe.
You do not have to make huge savings, $50 or $100 each week is enough. This cash will accumulate over time. Just ensure you are saving something no matter how little it is. Start taking action that could lead you to financial free life.
Conclusion:
Getting out of debt may be quite difficult, but with the right commitment, an emergency fund, and a good repayment strategy, you should be able to repay your advance even during recession.
In America, there are millions of people struggling with all kinds of debts. Some end up repaying what they owe while other remain in debt for a long time. If you are one of those struggling with debt, you can get free professional help by enrolling in a program that suits your needs. You can check the ones I’ve researched in the past and provided detailed description on each in this article, or you can do your research and enrol.
