Financial independence and debt free retirement can easily be achieved by paying off debt and maintaining solid savings. The highest amount of personal debts can usually be traced to student loans, car loans, credit card balances and mortgages. Before paying off your debt, you are strongly advised to pay yourself first. While working to pay off your debt, you need to set the right balance between savings and debt repayment. According to Fidelity Investments, the following 3 steps will help you get out of debt faster and build a sustainable savings:
1. Have sufficient savings to cover 3 to 6 months of expenses.
When estimating your expenses, always pay attention to critical areas like housing, utilities, food, debt and personal expenses. Additional items like non-essential shopping, entertainment and vacation should be placed on a separate, dispensable list. Although setting aside 3 to 6 months expenses is admirable, you may need much more than that to cover emergencies. The same can be said if you are working in a high-risk industry or have an inconsistent income.
2. Start paying the debt with the highest interest rate
Focus on paying credit card balances with high interest in order to reduce the rising interest normally associated with minimum monthly payments. The move will also hasten the debt payoff on your remaining balances. To keep your credit card debt low, avoid using your credit card to make high value purchases. Some credit cards charge interest rates as high as 15%, which may compound the challenge of your efforts to clear debts faster. The repayment period may be further delayed if you commit to paying the minimal balance. The other important debt to get out of your way is the student loan. Remember, most private student loans carry higher interest rates of between 6 to 15% compared to government instituted student loans that attract about 5% interest rate.
3. Contribute diligently to your retirement plan and health savings account
Traditionally, working Americans have been saving for retirement by maxing the 401 (k) with a defined workplace contribution. A Health Savings Account (HSA) is another important tool that can help you safeguard your financial future. The tax-advantaged savings account targets people with High Deductible Health Plans (HDHPs) with a requirement for out of pocket medical treatment expenses. For individuals who qualify, the fund is yours to keep and can be used for investment. Contributions to the account can be made until the retirement age via payroll deductions.
What should come first: debt repayment or savings?
There are a couple of scenarios that may force you to consider debt repayments ahead of savings. According to Bankrate, you can be prompted to pay debts in the first instance if you have high interest consumer debts. Paying high interest debt more aggressively will go a long way to reduce your interest payments and bring the overall debt to manageable levels. At the same time, you need to explore ways to increase your income and create a budget that places emphasis on debt repayment. Some of the reasons that may prompt you to make savings a priority include having a low interest credit card and access to retirement savings.
You can make the most out of the retirement savings by contributing sufficient amounts that can be matched by the employer. Making savings your priority is also important when it comes to building an emergency kit to cover any unexpected expenses and unbudgeted personal expenses. According to most financial expert, the ideal situation is striking a balance between paying the debt off and saving. Building satisfactory savings will give you the much-desired peace of mind. You can actually set a savings threshold that will give you some latitude on how much you can withdraw to pay debt and maintain in your account.
How a debt expert can help you out
If you have crippling or unaffordable debt, a personal finance expert or debt solutions provider can help you choose the right course to resolve the debt issues. The solutions may include freezing interest and charges, one affordable monthly payments and debt write-off. When choosing a debt expert, you need to look at their experience, customer testimonials, privacy and confidentiality policy and the credentials of the advisors. Debt experts like Graylock Advisors go further by providing debt consolidation loans and low interest payments. To find out how much you can save with Graylock Advisors, simply visit the company website and calculate your estimates.