How to pay off debt and save money at the same time
We compiled a step-by-step checklist to help you get started:
Step 1: Create a budget
It’s almost impossible to pay off debt or save money unless you establish a budget. A budget allows you to make the most effective use of your money and identifies areas where you can reduce spending. First, list all sources of income – don’t forget things like government benefits. Next, list all your expenses. Lastly, cut out any unnecessary expenses and divvy up any leftover money between your debt payments and savings.
Ready to get started? Check out our detailed guide on budgeting.
Step 2: Learn how to save money
While a budget helps you start saving money, making progress comes down to creating good financial habits. Since you’re reading this, you likely have some work to do! To keep things simple, here are three takeaways that can help you start saving money immediately:
- Lifestyle: Saving money comes down to your lifestyle. While eating out on a regular basis, taking annual vacations or buying designer clothing is tempting, the average person can’t have it all. Choose only one to two items or hobbies you allow yourself to splurge on each month (and stick to your budget).
- Track your spending: Life is busy, so it’s easy to go days or weeks without checking your bank account balance. Set a reminder on your phone to review your spending each week, or download a mobile app to do it for you. Then, compare your spending against your budget each month and make adjustments as necessary.
- Find more room in your budget for savings: Either reduce your spending or earn more income. Then, allocate any leftover money in your budget for savings.
Step 3: Establish an emergency fund
An emergency fund:
1) prevents you from going into more debt by providing a security blanket you can dip into for unexpected expenses
2) helps you build money-saving habits by giving you a small milestone to work towards
People often ask, “how much money should I be saving?” The size of your emergency fund depends on your lifestyle. Start by working toward saving $1,000 a year for emergencies – this should be enough to cover most typical unexpected expenses (minor home repairs, car repairs and unexpected travel).
Step 3: Need help with debt? Try a consolidation loan to simplify your payment schedule.
A consolidation loan makes debt repayment more manageable by combining multiple bills into one simple monthly loan payment. You’ll have a set repayment schedule, meaning you’ll make fixed payments over the course of your loan term. At the end of the loan term, your debt is paid off.
Bonus: You could save hundreds to thousands of dollars in interest if your consolidation loan is a lower interest rate than all your other debts combined (that frees up more money for savings). Our suggestion? If you’re a homeowner, try consolidating your debt with a secured loan to access a lower interest rate.
Step 4: Save your money in the right types of investments (hint: look for high return investments)
If you’re paying down a credit card with a 29% interest rate, and only seeing a 1-2% return on your savings account, saving your money won’t be worth it. So, if it’s really important to save money while you’re paying down debt, make sure you explore savings accounts or investments that yield the best possible return. If you can’t find a high return investment, focus on paying off your high interest debt first. Then, catch up on savings once you’re debt-free and have more room in your budget.
Step 5: Prioritize saving for retirement
Most retirement funds will give you a good rate of return. On top of that, RRSP contributions can help you qualify for an annual tax refund – that’s extra money you can use towards debt! So, if you don’t have a lot of money to allocate towards savings while your paying off debt, focus on saving for retirement.
Put a hold on these types of savings until your debt is paid off:
- Vacation fund
- Home renovations (note: your emergency fund can help cover home repairs)
- Saving for a car (unless you absolutely need a new one to keep working)
Once you’re debt-free, you can work towards these types of savings again.
Step 6: Automate savings and debt payments
Paying down debt and saving money have one thing in common: it’s easier to stay on track when you automate. Align automated transfers and payments with your payday. You won’t have a chance to the spend the money before it leaves your account, and over time, you’ll learn to adjust to the lower balance in your account on payday.
Don’t forget to track your progress. It might be difficult changing your habits and lifestyle to align with your financial goals, but having regular progress check-ins will help keep you motivated.
Looking for more tips to pay off your debt faster? You might like these articles:
- Learn about debt to income ratio and how to calculate it
- Check out our top tips for getting out of debt (for good)
- These simple changes can help you save money on your loan
Interested in a loan? Try our free loan quote! In just a few minutes, we’ll tell you how much money you could qualify for and what your payments might be. No obligation and no impact to your credit score.