Debt elimination: Introduction
What’s more important – saving or reducing debt? Should I focus on debt elimination or invest excess funds? Should I invest or reduce debt.
These are age-old questions that I’m frequently asked and there isn’t a one-size-fits-all answer. Let’s get back to basics and figure out what your income and expenses are before I can answer whether it’s better for you to save or reduce debt.
Debt elimination: Create a budget
Everyone should have one. The reality is that many people spend what they earn but don’t really know what they’re spending their money on. A budget will find how you’re currently allocating your money – which may be very different from how you should be allocating it.
- Detail your income
- Itemize your fixed expenses which are the same each month – housing, insurance, payments on loans, etc.
- List your variable expenses which are flexible and will vary from month to month – groceries, gas for the car, cell phone, etc.
- Identify your optional expenses which are non-necessities – meals out, clothing, vacations, etc.
The good news is that to ask “Should I invest or reduce debt”, that means your budget should confirm that you have an excess of income over expenses each month. It also means that you can see that monthly cash excess in your bank account.
Debt elimination: Determine what type of debt you’re dealing with
The reality is that not all debt is created equal. Credit card debt could be costing you 20% interest or more per annum. And, if you have any payday loans, the interest rate could be over 500% (no, this isn’t a typo). High interest debt costs a fortune; pay it off as quickly as possible.
Debt elimination: Create an emergency fund
I always recommend that you have an emergency fund of three to six months worth of living expenses. Job loss or an unexpected expense can put you in a financial danger zone if you’re not prepared.
Debt elimination: Where can you find the money to pay off high interest debt and create an emergency fund?
Go back to your budget and have a good hard look. How many of your optional expenses can you cut or cut back on? E.g. Forgo the vacation for now, don’t buy those really cute shoes, etc.
How much of your variable expenses can be reduced? E.g. Shop at a discount supermarket and price match/use coupons, comparison shop for better cell phone plans, drive less/take public transit more, etc.
You’d be amazed how much money you’ll be able to save and put toward paying off high interest debt and creating an emergency fund.
Debt elimination: Should I invest or reduce debt?
The answer to the question about what’s more important – saving or reducing debt, lies in your budget. If you have high interest debt, pay it off first. If you don’t have high interest debt then you can work on both reducing debt and saving and investing at the same time.
Debt elimination: Are you struggling with debt elimination?
If you’re struggling with too much debt, give the Ira Smith Team a call. We can help with budgeting and credit counseling so that you can get back on track Starting Over, Starting Now.
