Financial experts tout the importance of building savings and eliminating debt. However, 53% of Americans do not have an emergency fund and according to America Saves, the average amount of delinquent accounts in collections are for a balance of $400. If you’re like the average American, you may need help building your savings and tackling debt. Fortunately, it’s never too late to make positive changes to your financial situation.
First, let’s talk about saving and building an emergency fund. An emergency fund acts just like that—money to fund an emergency such as a car repair or unexpected healthcare bill. A good starting balance for an emergency fund is $1,000. A savings account can be for any future financial goals: vacation, retirement, college, a new car, or even a new home.
Next, debt is simply money owed usually with interest. Debts that should be paid off as quickly as possible include late utility payments, payday loans, credit card balances, and medical bills.
Did you know? A typical American has four credit cards with average balances of $6,200.
To get started, look at these common situations and see if any apply to you.
High interest debt: you may or may not have money saved, but your debt(s) has a high interest rate making it difficult to pay down.
Try this: High interest debts are the costliest. Make payments that are larger than the minimum amount due, even if it’s $10 more. That extra amount will be applied to the principal balance, lowering your amount and interest due. Repeat this with the next highest balance, and then the next until debt is gone.
High balance: you may or may not have money saved, but your debt(s) have a high balance (such as student loans) and therefore a high monthly payment.
Try this: It seems counterintuitive, but pay off your smallest balance first. Then, use that monthly payment amount to the next smallest balance, and so on. These “small” victories of seeing balances paid off will keep you disciplined and determined to keep going.
No savings: you may or may not have debt, but you have no money saved for an emergency or for your future goals.
Try this: Set up automatic deposits from each paycheck to a savings account separate from your checking account. By using a different account, your savings is out of sight, out of mind and you can be assured it’ll be there when you need it.
You spend your savings: you have money in your savings account, but you find yourself using it for monthly bills, debts, or other unexpected purchases.
Try this: Continue to set aside money into your savings but also create and follow a strict monthly budget (it’s temporary!). This small tweak will allow you to keep saving while also taking care of your monthly bills. Not sure where to start when it comes to a budget? Our previous blog on 5 Steps to Building a Beginner’s Budget can help
These scenarios are common but are not the only ones you may find yourself in. For example, if you have no savings, and both high interest and high balance debts, you might start by putting even $5 towards all three accounts each month. You’ll start to see your savings increase and your debts decrease, which will help lower stress and empower you to take control of your finances.
Get clear and focused on why you want to save money and pay off debt. When you’re honest with yourself and know the why behind your motivations, you’re more likely to commit and follow through.
If you’re still feeling overwhelmed, we are ready to help you strengthen your financial future. You can bank on us.