So you want to pay off debt. That’s awesome! In fact, I want to take a moment to applaud you. Making that decision is BIG and will have a huge impact on your finances from here on out. But what about saving money? Should you still send money to savings and retirement while tackling debt?
Our family faced this same question while we were on our debt free journey. And so many others have written to ask me this same question. Guess what! There are tons of opinions on what you should be doing while you’re paying off debt. Some people say to stop saving money altogether. Others say it’s still smart to save.
But to be honest, personal finances are just that. They are PERSONAL.
But here’s the truth: you CAN save money while paying off debt! We did, and so many others have as well! So let’s break down how to save money while still paying off debt (all at the same time!).
1. It all starts with a budget.
Yep, that’s right. I went there. I used the “b” word right away. But hear me out! A budget is not a bad word. So many people link the idea of writing a budget to not getting what they want. But to be honest, a budget is simply a plan for your money. You can still buy what you want. You can still spend money where your heart desires. It just all comes down to what you can afford.
If you’ve never made a budget, don’t worry! You are not alone, friend. It’s honestly not as hard as you think. And it’s not as intimidating either! Just like it takes to learn how to ride a bike, it will take you time and practice to learn how to write (and stick to) your budget.
If you need help with getting started on a budget, then you’ll want to read my step by step guide on writing your first budget.
When you make budgeting a habit, you will find ways to send extra money to debt and savings. It will show you where you’re spending your money and help you determine how you can pay off debt faster! So before you do anything, set up your first budget! You won’t regret it!
2. Set up an emergency fund.
Before you even think about sending extra money toward your debt payments, you’ll want to have an emergency fund set up. Simply open a savings account at your bank and start setting aside money in savings. You don’t need a ton in here. I recommend a minimum of $2,000. If you have a family, then set aside $1,000 per person. That means if there are 4 people in your family, you’ll save $4,000.
Having an emergency fund in place will keep you from gaining more debt while you’re paying off debt. You see, somewhere along the way SOMETHING WILL GO WRONG. It’s not a surprise! I promise that it will happen.
Whether someone has to make a run to the emergency room or your pet needs surgery (both of these happened to us!), life will happen whether or not you’re financially prepared. Having money in a savings account for emergencies and major unexpected expenses will keep you from taking out another loan or putting large expenses on your credit card.
The hope in all this is to get out of debt, not go back into it! If you have more questions about setting up an emergency fund, don’t worry! I’ve got you covered. I’m sharing all about how to set up an emergency fund HERE.
3. Start saving money for what you know you’ll need.
While you’re sending extra money to pay off debt, still save money for what you know you’ll need in the future. For instance, it’s a great idea to still save money each month for Christmas. This way, when December rolls around, you aren’t going into debt to buy gifts.
To help you save money while paying off debt, set up sinking funds in your budget. Sinking funds are a great way to save money for things like Christmas, car expenses, vacations, or pet expenses.
You can save money in sinking funds in one of two ways. Either grab a cash envelope and pull out cash each month to save in your sinking fund or set up separate savings accounts for what you’ll need.
If you want to save money in a cash envelope, I’ve got you covered! I’ve created an entire guide to getting started with the cash envelope system. Not only is it FREE (the word “free” is music to my ears), but I’m also giving you printable cash envelopes that you can download and keep forever. Sign up below for my Budgeting Basics Email Course and you’ll get all the info sent straight to your inbox!
Make sure you’re taking part of your income each month and saving it for what you know you’ll need in the future. Your future self will thank you and it will make your life so much easier!
4. Pause your debt payments when emergencies happen.
We all know that emergencies will happen. You should expect them. There will be plenty of times when you’ll need to use your emergency fund. I know that it happened to us! While working to pay off debt, our dog needed emergency surgery to have one of his legs removed. This caught us by surprise and was not cheap.
Thankfully, we had $4,000 in our emergency fund at the time and that covered his entire surgery. We had very little money leftover in our emergency fund after his surgery. I’m not going to lie to you. It was so frustrating when we realized we would need to pause everything to fill that savings account back up.
But we did it. Instead of sending extra money toward our debt payments, we paid the minimum on all our loans. Any extra penny we could find, we sent to our savings account. As soon as our emergency fund was back up to $4,000 we started working to pay off debt again.
Expect that somewhere along the way you’ll need to use the money you set aside in savings to cover unexpected expenses. But know that this is completely okay! That’s why it’s there! You have money in savings so that you can pay for big expenses that are necessary without putting those charges on a credit card. This will help you stay focused on your debt free journey and keep you on track!
5. Yes, you can still contribute to retirement.
This is where things are going to get a little controversial. Some people will tell you to halt all retirement contributions while you’re paying off debt. But let’s be real here. If you’re in your 40s or 50s then the idea of stopping your retirement is nervewracking.
Obviously, if you stop all retirement contributions you’ll get out of debt sooner. But if the company you work for matches your retirement then you’ll lose out on money!
Ultimately, you’ll need to find what works for you. While our family was working our debt free journey (you can read all about how we paid off $111,000 on two teacher salaries here), we still contributed to our teacher pension funds.
Once we were completely debt free, we started saving money in two Roth IRAs. We were able to save SO MUCH MONEY each month after we were debt free because our lifestyle had changed during our 4.5 years of sacrifice. The idea of spending all that money seemed silly. Saving is definitely a non-negotiable for our family and I hope that it is for yours as well!
6. Pay off debt as fast as possible.
Once you have a budget in place, an emergency fund set up, and you’re saving money in sinking funds, you’re ready to pay off debt FAST. That means you buckle down, cut any unnecessary expenses, and send any extra penny to debt.
The more you sacrifice, the sooner you’ll see results. With our family, we buckled down as much as we could so that we could get out of debt fast. Our debt free journey took us 4.5 years (which felt like a lifetime), but it was SO WORTH IT.
We said “no” to many things in the moment so that we could say yes to our future. We skipped out on huge family vacations, chose to eat at home most nights, and lived a very simple life. There were times it was so hard. There were times I wanted to give up. But now that I’m on the other side, I’m so happy that we stuck with it. Paying off debt taught us more than how to handle our finances. It taught us patience, perseverance, and sacrifice.
The ultimate goal is to become debt free. When you have zero debt payments, you are freeing up room in your budget to save for what you want! You can travel, save for retirement, or make as many Target runs as you wish with zero guilt.
Yes, it’s possible to save money and pay off debt at the same time!
There’s no doubt about it…you CAN save money and pay off debt at the same time. In fact, I recommend that you do just that! Saving money while paying off debt will prepare you for any unexpected expenses that will come your way. It will also keep you from going into more debt when life happens.