Learning how to manage debt and save money can be a daunting task. So, when creating a savings and debt reduction plan, it’s important to take the time to design a strategy that is realistic and makes sense for you. Here are 12 ways you can reduce your debt and save more.
1. Spend less than you make.
Spending less money than you bring in is the golden rule when it comes to saving money and reducing debt. Whether you are 10 years into retirement or a young, working professional, these are words to live by.
2. Join your employer’s retirement plan.
In order to manage debt, you’ll need to start paying it off. This includes credit card debt, personal loans, 401K loans, payday loans, and any other unsecured debt.
Unsecured debt is debt that is not backed by an asset and the interest rate is not tax deductible. Unsecured debt is often referred to as “bad debt” because the interest rate is high and should be paid off as soon as possible.
3. Pay off “bad” debt.
In order to manage debt, you’ll need to start paying it off. This includes credit card debt, personal loans, 401K loans, payday loans, and any other unsecured debt.
Unsecured debt is debt that is not backed by an asset and the interest rate is not tax deductible. Unsecured debt is often referred to as “bad debt” because the interest rate is high and should be paid off as soon as possible.
4. Build an emergency fund.
Having an emergency fund is very important. The money in your emergency fund should be liquid, as in easily accessible, and should be enough to live on for three to six months.
Having an emergency fund is a proactive way to manage debt because you can prevent the need to take out loans to pay for things in emergency situations, such as a medical bills after an accident or losing your job.
5. Start an IRA.
Start an IRA for both you and your spouse. It’s best to begin with a deductible IRA; however, if you have a retirement plan at work, you are not eligible for a deductible IRA. In this case, you should opt to start contributing to a Roth IRA.
Increase your IRA contributions by half of your annual pay raises until your IRAs are maxed out for both you and your spouse. After you turn 50, plan to contribute to the “catch up” provision for you and your spouse as well. Make sure to save ahead of time so you are able to purchase your IRAs on January 2 of each year.
If you have questions about this, don’t fear. A financial advisor can help you determine how an IRA can best work for you.
6. Purchase insurance.
Life is unpredictable and because of that, it’s important to have insurance. Purchase the appropriate insurance that is not provided by your employer. This can include medical, homeowners or renters, term life, umbrella liability, auto, and disability income insurance. At age 55, you should invest in long-term care insurance.
7. Pay off student loans.
Student loans are considered “good debt” because they have low interest rates. However, do not let this fool you; student loans are dangerous to have because even if you declare bankruptcy, your student loans will not disappear. Therefore, it is best to pay them off as soon as possible.
8. Put away money for your next home.
To avoid paying private mortgage insurance when you purchase your next home, start putting away enough money to make a 20% down payment on your next home.
Mortgage debt is considered reasonable debt because the interest rate is relatively low. If a 30-year mortgage will allow you to save more money or reduce bad debt, stick with a 30-year mortgage as opposed to a 15-year mortgage. Take out a fixed rate mortgage when mortgage interest rates are low and take out a variable rate mortgage when interest rates are high.
9. Save for your next car.
A car loan has a low interest rate because the loan is secured. That being said, we don’t recommend getting a car loan that will last more than 36 months. If you will need a longer-term loan to afford the car you want, it would be best to save more for the down payment or opt for a more affordable vehicle.
It is also important to pay off each car loan before buying another car. If you and your spouse both need a car, it’s wise to purchase a new car every five years, keeping in mind that each car will last about 10 years.
10. Start building your child’s college fund.
The price of a college education is only getting more expensive. That said, saving for your child’s college should be your last financial objective. While you can borrow money to pay for college, you can’t borrow money to pay for your retirement.
11. Pay off your mortgage before you retire.
After you retire, you will have a reduced or limited income. Your mortgage is a huge monthly expense, and you will thank yourself later for paying it off earlier rather than later.
12. Delay taking Social Security.
The key here is while it is best to delay taking Social Security for as long as possible, you should absolutely take it when you need it. If you’re still working but of retirement age, the income taxes on your Social Security income will be very high. Additionally, every year Social Security is delayed beyond age 62, future payments will increase between 6.5% and 8.3% per year. This rule extends until you reach your maximum eligible payment at age 70 and means that you are guaranteed a monthly Social Security income of 76% more than what could have been received at age 62.
It goes without saying that you should be saving and you should be paying off your debt. Following a calculated plan to save money and manage debt is the best way to ensure you and your finances are prepared for things life may throw your way. These 12 steps are a great place to start planning for your future.
Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.