Debt Savings

6 Step Plan to Pay Off Debt and Save Money

Do you have debt and no savings? Well, this 6 step plan will help you pay off debt and save money at the same time. Read for more info so you can get a handle on your finances today.
This post may contain affiliate links. See disclosure policy here.

 

If you’re in debt, saving money shouldn’t be optional. In the event of an emergency, the last thing you want to do is go further into debt.  This is why I’m a firm believer that you should pay off debt and save money at the same time.

The amount you should save varies per individual. Dave Ramsey recommends saving $1,000 and then focus on paying off debt. However, each person should do what’s best for them.

If you have a mortgage and kids, you might not feel comfortable with having only $1,000 in savings for an emergency. If you’re single with no kids, this amount may be perfect for you.

Regardless of the number, most people struggle with how it can actually be possible to save while in debt. If you’re living paycheck to paycheck and have a lot of debt, it can seem impossible to save any money at all.

Well, there’s a way to make it happen and today I’m going to show you how. So, kick up your feet and settle in. Let’s focus on how you can pay off debt and save at the same time.
Do you have debt and no savings? Well, this 6 step plan will help you pay off debt and save money at the same time. Read for more info so you can get a handle on your finances today.

How to Pay Off Debt and Save Money

1) Eliminate any non-essential expenses.

The very first step of the process should be monitoring your expenses. You have to make sure you don’t have any money leaks.

For instance, the most common types of leaks are automatic expenses that are withdrawn from your account that you’ve long forgotten about. You know that magazine subscription, unnecessary warranty or gym membership.

Take a look at your bank statement and highlight any expenses that you no longer need. This extra money is automatic savings without much effort.

Related Reading: What I Learned From Tracking Expenses for a Month

 

2) Figure out how much money you owe.

You need a separate spreadsheet or list of all of your debts. Add all of them up to get a total of how much money you’re throwing at your debt each month.

 

3) Create a new budget.

Your new budget should NOT include the expenses you decided to eliminate in step 1, but it should include your total debt payment.

If the total of your new budget (current expenses and debt repayment) is greater than your income , you have an income issue that needs to be addressed.   Take a look at How to Make More Money for help.

If you have extra money left over after your expenses and debt have been accounted for, this is great news!  Now you just need to tell this extra money where to go.

Since you’re in debt, of course, you want to contribute some of it towards your debt payment. However, this is an opportunity to save as well.

Related reading: Budgets: Quick, Easy, Simple Method for BeginnersHow to Create a Budget That Won’t Fail, and How to Have a Life and a Budget

 

4) Decide what percentage you want to put towards debt.

This is an opportunity to build your savings muscles. If you’re not used to saving, you will get into the habit of doing so following this method.

You should decide what percentage of your leftover income you want to contribute to your debt and what percentage to put in savings.

For instance, if you have a leftover amount of $50.00, you may decide to save 5 percent and put the other 90 percent towards your debt.

Five percent of $50.00 isn’t much, but the amount you’re saving isn’t important. What’s important is that you learn how to save!

 

5) Make it automatic.

The next step is to make saving automatic!  This is the easiest way to grow your savings.

So, you’ve decided to save 5 percent of $50.00 each month. That’s $2.50 towards savings and $47.50 towards your debt.

Now, if you tried to set aside this $2.50 manually, it would be easy to spend it because after all, it seems like such a small amount. I mean, it doesn’t even seem worth it.

However, if you opened a separate account and set up an automatic deposit of $2.50 per month, the money is out of sight, out of mind.

I recommend opening an online savings account with Capital One 360. If you already have some savings, you could actually make money doing this. How? Well, if you open a savings account with Capital One 360 using this link and deposit $250, you’ll receive $25.00.

 

6) Make changes as you the amount of debt you owe changes.

We will discuss this more below. For now just remember that you need to be prepared to make adjustments to your plan.

 

Let me give you an example of how one can pay off debt and save money.

 

Alyssa is a 33-year-old, engaged mother of one.  She has a total of $8,000 in credit card debt.

She has no emergency savings, no savings for a wedding, and wants to be debt free before getting married.

Considering she has a child and a savings goal to pay for a wedding in cash, she needs a plan to help her build her savings and pay off her debt at the same time.

Here are the details for the credit cards below. This chart includes the amount of interest she would pay and the length of time it would take to pay off these debts if she continued to make the minimum payment.
illustration of how to pay off debt and save at the same time

Alyssa starts working the steps mentioned above.

 

1) Eliminate any non-essential expenses.

After an evaluation of her bank statement, Alyssa has determined there are many things she can cut out of her budget. Here is a list of the things she is cutting out of her budget, her reasoning, and how much it’s saving her each month.

  • Daily lunch at the office (she can bring leftovers from dinner) = Total Savings $160
  • Calls payroll to eliminate work gym fee (she can walk after work) = Total Savings $19
  • Cable (she’s never home to watch television anyway) = Total Savings $140
  • Kid subscription box (her daughter seems uninterested in it) = Total Savings $23

Alyssa has eliminated a total of $342 from her expenses. Maybe your savings won’t be as high as Alyssa, but take notice of the fact she cut out some smaller expenses that total $42.00. Even $42.00 could have a major impact on boosting your savings and eradicating debt!

 

Here are a few additional ways you could save more money: 

 

2) Figure out how much money you owe.

Based on the chart above of Alyssa’s debt, the total amount of her monthly minimum payments is $320.

Some of you may be ready to stop here. Afterall, Alyssa just eliminated $342 from her monthly expenses. She has enough to save and pay her minimum so why go any further?

Well, she still hasn’t created a new budget that includes her savings and the amount she was already contributing to her debt.

Her previous budget already accounted for her monthly minimum debt payment of $320. What it doesn’t account for are the savings she earned by eliminating some of her expenses.  

 

3) Create a new budget.

With her new budget, Alyssa is going to include her monthly minimum payment and the extra $342 she gained by eliminating her gym membership, lunches, kids subscription, and cable.

By doing this she will speed up her debt repayment and she will build her savings account.  Let’s take a look at how it plays out.

Total Net Income – $2,200

New Expense Total – $1,858 (includes rent, utilities, minimum debt repayment, and other essentials)

Amount Left Over – $342

 

4) Decide what percentage you want to put towards debt.

Now using this information, Alyssa can determine the ratio she wants to put towards her debt and her savings. Since she has no savings at all and still wants to get rid of her debt, she has decided on 80/10 debt/savings ratio.

Each month she will take 10 percent of $342 and put it into savings. Her savings amount each month will be $34.20.

The remaining 80 percent ($307.8) will go toward her credit card with the highest interest rate (Card 2).

 

5) Make it automatic.

To make life easier she is going to automatically have her $34.20 deposited into her Capital One 360 savings account. By the end of the year, she should have a $410.40, right?

Well, it could certainly work out that way if her situation stayed the same every month – but it won’t.

 

6) Make changes as the amount of debt you owe changes.

Each month Alyssa is paying an extra $307.80 towards her principle on Card 2. This card has $4,500 worth of debt and each month the principle is steadily going down. She will begin paying a total of $488 on this card each month.

In 11 months Card 2 will be paid off! Also, in 11 months she will have $376.00 in savings. This is when things can change for her.

With one credit card completely gone, she can now focus solely on Card 1.

She still has the same extra $342 extra + the $180  she was paying on Card 2 to put towards debt and use for savings ($522 total). This is when she decides to get more aggressive with her savings goal. She implements a 75/25 approach.

Using this approach, 75 percent of her extra  ($391.50) will go towards Card 1 and $130.50 will go towards her savings.

She changes her direct deposit to reflect the changes and she begins putting $391.50 towards Card 1.

After paying this amount for 10 months, Alyssa is now debt free and has $1,715 in her emergency fund!

Once Card 1 is paid off that adds another $140 back to her budget. This brings her total extra money at the end of the month to a whopping $662.

Now that Alyssa has paid off $8,000 in debt and built her emergency fund to $1,000, she is planning to split this $622 in extra funds between her emergency fund and wedding fund.

 

In Conclusion

Of course, this situation is just an example, but Alyssa was able to pay off her debt in under two years versus the 12 years it would have taken making minimum payments. Plus, she built a nice starter emergency fund.

Maybe the amount of expense you can eliminate won’t be as much as Alyssa’s, but don’t be discouraged!

The purpose of this article is to illustrate how it is possible to pay down debt and save money at the same time. It doesn’t matter if it’s just $10, the savings will add up and the extra payment on your principal will decrease your debt over time.

You just have to stick with it and be committed!  Work the steps: 1) eliminate expenses, 2) figure out how much you owe, 3) create a new budget, 4) determine your debt/savings ratio, 5) make it automatic, and 6) adjust as your situation changes.  

It may take you a few months or a few years, but if you create a plan and make your savings automatic you will reach your goal. Now, go do the work and after you’ve paid off debt and saved some money, come back here and tell me all about it. I want to know!

 

Anyone have any additional helpful advice for paying off debt and saving money?

Are you currently in debt and need to save money? If so, are you going to try to work the steps discussed?

 

Join the Automated Savings Challenge

Get your Automated Savings Printable and updates on all things money related!

Powered by ConvertKit
Latoya Scott
Writer/Creator
Latoya is a writer for hire who loves talking about budgets and money. Her mission includes paying off $79,000 in student loans and aspiring other millennials to hustle their way towards financial freedom. Her work has been featured on The Huffington Post, Rockstar Finance, and My Fab Finance.

You Might Also Like

37 Comments

  • Reply Ty August 29, 2016 at 2:24 pm

    These are some awesome tips. I found myself taking notes while reading this.
    I need this in my life right now.
    Ty recently posted…Taraji P. Henson Collabs With MAC for the Taraji CollectionMy Profile

  • Reply Artney (Sarah's Grace) August 29, 2016 at 7:10 pm

    This is great info! I attended a financial seminar with Rachel Cruze at my church and it was very informative. We’ve already started our process of being debt free. Definitely pinning this for later! Thank you for sharing.
    Artney (Sarah’s Grace) recently posted…When Healing Doesn’t ComeMy Profile

  • Reply Aisha Johnson Adams August 29, 2016 at 7:30 pm

    My husband and I are building a new budget. Thanks for these tips. I will send this article over to him.

  • Reply Eva August 29, 2016 at 8:58 pm

    We just cut out lots of non essentials! Imagine my surprise when I found out last night that to get the bill cut in half, we no longer have satellite TV upstairs! But it is all worth it.

  • Reply Stacie August 29, 2016 at 9:00 pm

    Practical tips to live by! Now I just need you to show me how to grow that money tree.
    Stacie recently posted…How to Wear Last Year’s Fall Trends This YearMy Profile

    • Reply Latoya Scott August 29, 2016 at 11:01 pm

      I will definitely make sure I get on a few posts that address that! Thanks, Stacie!

  • Reply Tia @ financiallyfitandfab August 30, 2016 at 3:09 pm

    Cutting non-essentials is definitely key! The only thing I would add in the example you gave is to possible do a balance transfer to get rid of those high interest cards! It is crazy how much is paid in interest each year.
    Tia @ financiallyfitandfab recently posted…4 Best Apps to Automate SavingMy Profile

    • Reply Latoya Scott August 30, 2016 at 4:55 pm

      Oooh, that’s a good one, Tia! I didn’t even think of that and yes, I agree those interest rates are outrageous. I actually think mine are higher than this which is why I pay that sucker off in full every time I use it.

  • Reply VeePeeJay (Vashti) August 30, 2016 at 4:10 pm

    These are amazing tips. We are really blessed to not have and debt currently. We have not had cable in almost 10 years and cutting out non-essentials definitely helps.
    VeePeeJay (Vashti) recently posted…Perfect Crochet Twists with Latched & Hooked Zoe Collection + COUPON CODEMy Profile

    • Reply Latoya Scott August 30, 2016 at 4:54 pm

      Yes, girl! Blessing indeed! That’s awesome!

  • Reply Kirstin Fuller August 30, 2016 at 6:01 pm

    Great article. My favorite tip is to make it automatic. I think that’s the best way to save along with cutting out non-essentials.
    Kirstin Fuller recently posted…Easy Beauty Travel Hacks!My Profile

  • Reply KenyaRae August 31, 2016 at 12:41 am

    We’ve cut out the non essentials in the budget but there is still some fat to be trimmed. With me staying home recently it has to happen.
    KenyaRae recently posted…When Choosing Light Still Gets DarkMy Profile

  • Reply Kim August 31, 2016 at 12:57 am

    I always love reading your budgeting posts. This will come in handy for someone looking to get out of debt.
    Kim recently posted…Millennial Moms Save on Health, Beauty & Wellness with GrouponMy Profile

  • Reply Mimi Green August 31, 2016 at 10:04 am

    These are tried and true. Reading your blog post helps me keep my financial goals in my face. They remind me not to eat out for lunch. lol

  • Reply Kiwi August 31, 2016 at 10:38 am

    Wow you really break this down! Most of us are really trying to get out of debt! I know I am I am going to take your advice and take the money out of my account automatically and put into a savings.
    Kiwi recently posted…Food Review | The Chemist Cocktail and Modern Cuisine (Myrtle Beach)My Profile

  • Reply Joanae August 31, 2016 at 10:40 am

    Recently removed the car washes and random Target runs. We are working on something else to ditch!

    • Reply Latoya Scott August 31, 2016 at 1:10 pm

      Yeah, those Target runs will get you good!

  • Reply Nikka Shae August 31, 2016 at 7:11 pm

    I saved my money by taking more leftovers than buying my lunch!! It was a good move!!

  • Reply Holly@ClubThrifty September 1, 2016 at 10:18 am

    This is great advice! Best of all, the stress of cutting back and paying off debt is only temporary. Once debt is paid off, you have more wiggle room and can live a little again =) I think people are afraid to sacrifice because they think it’s forever. In reality, a short stint of sacrifice can set you up for life.
    Holly@ClubThrifty recently posted…Holly’s Top Credit Card Picks for September 2016My Profile

  • Reply Terri September 1, 2016 at 5:10 pm

    Automating my savings has to be the best thing I’ve ever done to improve my finances. I want to get to the point that I can automate all of my bill payments eventually.
    Terri recently posted…How to Save Money Without Falling for the CatchMy Profile

    • Reply Latoya Scott September 1, 2016 at 9:31 pm

      Yes, having all of your bills automated is nice! We’ve been doing it for years and it saves us a lot of hassle!

  • Reply Finance Solver September 2, 2016 at 12:56 am

    I love the automation part. I have my 401k set so that it takes out close to 15k by the end of the year. Next year I’m certainly going to max it out plus contribute to an HSA. Who knows how much more I can save the year after that!
    Finance Solver recently posted…Only Get Debt That Give More Value Than the CostMy Profile

  • Reply Chelsea December 26, 2016 at 8:06 pm

    These are some really helpful tips! I never thought about adding them together. My fiancé and I will have to try it. Thank you!

  • Reply Brandi January 12, 2017 at 2:48 pm

    This is SUPER helpful, it showed me that I can do BOTH, saving and debt repayment.
    Thank you so much!

  • Leave a Reply

    CommentLuv badge

    Top