6 tips to pay off debt and save money
The thought of paying down debt may seem overwhelming, but our tips can help you learn how to pay off debt and save more toward your goals.
Monthly debt payments can challenge your budget and make it difficult to save. And high interest rates and lengthy repayment terms can make it impossible to wipe out debt quickly. Do these types of challenges have you worried about your financial well-being?
Average debt per U.S. household
If you’re struggling with debt, you’re not alone. According to Nerdwallet, the average debt per U.S. household is more than $163,000.1
|Source of debt||Average debt per U.S. household|
|Credit cards (revolving)2||$5,944|
|Any type of debt3||$163,268|
If you fall into any of these categories, don’t be discouraged. It is possible to regain confidence in your financial future.
How to pay off debt and save
1. Swap high-interest debt for lower-cost loans
In today’s environment, the interest you pay on debts—especially credit cards—typically exceeds what you could earn on savings. So, one of the biggest tips to pay off debt is focus on paying down these accounts to get ahead of the debt curve. Consider replacing high-interest debt with low-interest loans to help reduce costly finance charges. Then you can use any extra dollars you save or proceeds you receive to pay down existing debt.
2. Consider a home equity line of credit
A lower-interest option to consider is taking out a home equity line of credit. A home equity line of credit allows you to take the equity in your house and use it for other purposes. Once your line of credit is established, you can access the funds to pay down high-interest debt.
For example, if your home equity line of credit has a fixed rate of 7% and you use those funds to pay off other debts, including a credit card balance with an 18% variable rate, your savings would be substantial. Plus, unlike credit card interest, the home equity loan interest may be deductible if you itemize your deductions on your tax returns.
One additional benefit: you only pay interest on the amount of the credit line that’s used. For example, if you have a $30,000 credit line but only used $10,000, you will only pay interest on the $10,000 amount. Keep in mind that home equity loans can be set up with either a fixed or variable rate. Each offers certain benefits, so weigh both options to determine which is best for you. Keep in mind that you must examine your options carefully. An equity line of credit is secured by your home and, typically, there are costs associated with getting a line of credit.
3. Renegotiate with lenders
You might be surprised to discover how flexible some creditors can be. People who know how to pay off debt and save know that mortgage terms can be renegotiated and credit card rates lowered. Sometimes all you need to do is ask. If you’re unable to get the creditor to budge, take your business elsewhere if you can. You may also want to look into debt consolidation plans.
4. Develop a spending budget
While most people know how important it is to have a budget to track expenses, many don’t have one. Without realizing how much you’re spending each month, "small" expenses can add up. Creating a written budget for your household is an essential tip to save money and pay off debt by allowing you to gain control of spending and identify areas where you can save.
For example, cutting back on extras such as unused subscriptions and gym memberships may seem like a small step, but the benefits can add up. Determine where you can free up money and, if you have other members in your household, make sure they’re on board too.
5. Consider automating your savings
While applying the above tips to pay off debt, to help you save more, you may want to consider these additional options:
- Automatic contributions to employer-sponsored savings plans. One of the easiest ways to save is by contributing to an employer-sponsored savings plan, such as a 401(k). Any amount you invest is automatically removed from your paycheck, making it seamless and simple to manage. Consider investing at least enough to receive the full employer match or you could be missing an opportunity to add that money to your account.
- Systematic deposits to savings accounts. There are other simple ways to ensure you consistently save. First, take steps to cut down on your expenses so you can set aside extra money. Then, set up automatic transfers on a weekly or monthly basis to your account. Being consistent is essential to learning how to pay off debt and save.
6. Connect with a financial advisor for personalized advice
By managing costs and identifying sustainable saving opportunities, you can succeed at reducing your expenses so you have more money to pay down debt and build your savings. For personal tips to save money and pay off debt, an Ameriprise financial advisor can offer advice unique to your situation.
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At Ameriprise, the financial advice we give each of our clients is personalized, based on your goals and no one else's.
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