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Tips to help you pay off debt and save

Debt is a drag — in more ways than one. Monthly 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?

If so, you’re not alone. According to Nerdwallet, the average debt per U.S. household is more than $135K. Take a look at the chart below for a more granular breakdown, including average student loan debt, credit card debt, and housing debt per household1:

  Average debt per U.S. household Total debt by all U.S. consumers
Credit cards (revolving)2 $6,124 $413.7 billion
Mortgages $197,445 $9.78 trillion
Auto loans $27,649 $1.34 trillion
Student loans $46,459 $1.54 trillion
Any type of debt3 $137,729 $14.3 trillion
1Source: Nerdwallet (American Household Credit Card Debt Statistics: 2019)
2The credit card debt figures in this chart represent revolving credit card balances — those that are carried from month to month — rather than all credit card balances. Total U.S. credit card outstanding debt stands at $922 billion, which includes both revolving and transacting balances. (American Household Credit Card Debt Statistics: 2019)
3This debt can include mortgages, home equity lines of credit, auto loans, credit cards, student loans and other household debt, according to the Federal Reserve Bank of New York. (American Household Credit Card Debt Statistics: 2019)

If you fall into any of these categories, don’t be discouraged. It is possible to regain confidence in your financial future. Review these tips to help you pay down debt and free up money to save.

Create a debt payoff plan

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 it makes sense to 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 use any extra dollars you save or proceeds you receive to pay down existing debt — not to make new purchases. And don’t build up the original debts again.

Consider a home equity line of credit

A lower-interest option you may want 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 be sure to weigh both options to determine which one is best for you.

Renegotiate with lenders 

You might be surprised to discover how flexible some creditors can be. Mortgage terms can be renegotiated and credit card rates lowered. Negotiating credit card debt isn't hard – 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. 

Develop a spending budget

While most people know how important it is to have a budget to track expenses, far too many simply 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 can help you gain control of spending and identify areas where you can save.

For example, cutting back on extras such as magazine subscriptions and unused gym memberships may seem like a small step, but the benefits will add up. Determine where you can make sacrifices and be sure everyone in the family is on board. Such actions may also help your children understand the importance of taking personal responsibility for their own finances as they grow up.

Save more money

Nearly everyone can save more on a regular basis than they presently do. While applying the tips above can help free up money so you can 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. 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.

For example, let’s say your family of four eats out twice each week at an average of $45 per meal. If you cut out one of those meals weekly by eating at home instead, you could save $2,340 in a year. Now, instead of waiting until you have $2,340 at the end of the year and making a lump-sum deposit, set up automatic monthly deposits of $195 (representing one $45 family outing per week). This will help ensure your savings account grows over time without impacting your budget. Once you’ve adjusted to your new routine of eating out only once per week, move on to additional saving opportunities, such as reducing your cable bill or switching to public transportation. Just remember to use every extra dollar to either build your savings or pay down debt.

With creativity and discipline, you can succeed at reducing your expenses so you have more money to pay down debt and build your savings. Talk to your Ameriprise financial advisor about these and other steps you can take to help you regain control of your financial future.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.