How You Can Balance Saving with Paying Off Debt

When I made my first student loan payment, one of the first questions I had was, “How am I supposed to balance saving with paying off debt?”
I was 22 years old, ready to start my first newspaper job. I also owed $24,000 and had almost no savings. I had moved 11 hours from home for a new job, and my parents graciously footed the bill for the moving truck, packing supplies and hotel stay.

When I arrived at my new apartment, I realized I didn’t have enough money in my bank account to pay for my security deposit. I sheepishly asked my mom if I could borrow a few hundred dollars until my next payday.

I was so embarrassed.  Here I was starting my adult life and I had nothing to show for it. I immediately felt overwhelmed. I had so much debt to pay and so many things to save for. What if I lost my job? What if my car broke down? What if my apartment got broken into? I felt so hopeless and ashamed.

Why You Need Savings

This might sound basic, but you need savings because shit happens. If you don’t have savings for those moments in life when you need money, you’ll use a credit card to pay for it. The interest rate on a credit card is really high, so you’ll pay even more than you originally thought. Suddenly, you’re in credit card debt and scrambling to pay off the balance before you accrue more interest.

How I Learned to Save and Pay Off Debt

I was only making $28,000 at the time so I had to start small. Since I was working in the newspaper industry and had seen countless friends laid off, I decided to start with an emergency fund. An emergency fund is the savings you have for the expenses you can’t anticipate. I’ve used it to pay my car insurance deductible when my windshield was cracked, to cover my rent when my freelance income dipped and to pay for a security deposit until I got my old one back.I tell everyone who’s in debt or debt free – you need an emergency fund.

I don’t care how stable your job is or how willing your parents are to lend you money. An emergency fund is what prevents you from falling through the cracks and relying on credit cards to keep you going.

At the very least, you should have $1,000 saved. But if you’re working in a volatile field or in a high-cost city, then it’s better to have three month’s worth of expenses. My husband and I are both self-employed and we have about six month’s worth of expenses. If you have kids or a mortgage, you might want to have close to a year’s worth. Remember, you need to have three month’s worth of expenses, not income. So add up all the necessities you have each month and multiply that by your desired number of months.

I saved up three month’s worth of expenses before I started making extra payments on my student loans. I wanted to have a cash buffer before I worried about paying off my debt faster.

I was a fanatic about saving. I used almost every extra dollar from my paycheck, and I saved any birthday or Christmas checks or tax refunds. If I worked overtime, I stashed the difference in my savings. It took me about six months, I think, to save that initial emergency fund, and it’s been the basis of my savings ever since.

How I Save Now

Now that I’m debt free, I still work hard to save money. For a while, I kept everything in one bucket – my emergency fund, my vacation fund, my down payment fund. I use an Excel spreadsheet to track my money and kept separate line items for each of my different savings goals.

But that wasn’t enough. Sometimes I’d find myself dipping into those other goals to pay for something else, like a rental car for a vacation or a conference for work. I realized only this year that I needed to have separate accounts for each of my goals. That’s why right now I have five savings accounts.

I realized that having all my money in one bucket was too tempting for me to spend and I needed to divide it. I’ve already found this to be so much easier. When my husband asks how much is our emergency fund or how much do we have for car repairs, I can easily tell him by looking at my savings accounts.

Saving for the future is hard because it feels so far away. Most of us also assume that in the future we’ll have more money and fewer money problems. But that’s not true. Our future selves won’t be any different than our current ones, and they’re the ones who will need money for a new set of brake pads, a trip to Las Vegas for a bachelorette party or a flight back home for a funeral.

What I Use to Save

Capital One is my go-to bank for my saving accounts. I have multiple savings accounts because there are so many things I’m saving for, and I like to see them separated. For example, I have quarterly taxes that I pay four times a year, a car repair fund, vacation fund, future down payment savings and my retirement account (a SEP IRA).

And right now, if you open a Capital One savings or checking account, you’ll get an extra $25 (or $50 if you open both). 

You probably think it’s more confusing to have separate accounts for all these, right? Nope. I can clearly see how much money I have in each bucket and I can transfer these funds to my general checking account if I need to. See below – this is a real picture of what my savings account looks like (my emergency fund is another bank).

Another feature I love is that you can set goals for each savings account. For example, you probably see that there’s a bar next to my down payment fund – that shows how close I am to my goal (not very!).

I’m a visual learner and I love getting a visual representation of where my savings are.

Plus, Capital One currently has a .75% interest rate for savings, much higher than I’d find at other banks. For example, I have a PNC savings account attached to my checking, but it only has .25% interest.

Other banks, like Ally, offer 1.05% interest, but I didn’t feel like switching and transferring all my savings accounts for a .3% difference.

It’s also super easy to create a savings account through Capital One. It literally takes a few minutes, which is one of my favorite features. If I decide I suddenly want to start saving for something specific, I can do that. Like if I really wanted a new TV, I could set up a TV savings account and set up monthly transfers until I reached my goal.

I set up automatic transfers between my general checking account (which is at PNC) and my savings account. This is how much I save every month:

  • $50 to my vacation fund
  • $50 to my car repair fund
  • $1,000 to my down payment fund
  • $1,000 to my quarterly taxes account

Capital One isn’t the only bank that provides multiple savings accounts. Other popular options are:

  • Ally
  • Discover

I also send between $10 and $100 to my Health Savings Account or HSA, which is held at a different bank. An HSA is like a savings account designed for medical expenses. You can use money from an HSA to pay for out-of-pocket expenses, including eyeglasses, dental bills, and lab results. The IRS has a list of qualified expenses here.

Plus, you can deduct any HSA contributions on your taxes. A deduction, if you’re not aware, decreases your taxable income, so you’ll pay taxes on a smaller income. For someone who’s self-employed, this is a really important deduction. Also, HSA funds roll over from year to year. If you saved $1,500 this year, you can still use that money in 2018.

You can use an HSA like a savings account specifically for your medical expenses. If you want to get LASIK surgery, for example, you can set up monthly transfers from your general savings account. Then, when you’re ready for the procedure, you’ll already have the cash to pay for it. And you’ll get a sweet tax deduction!

But like any tax-deductible account, HSAs have some specific guidelines. You can’t contribute more than $3,400 a year for individuals or $6,750  for couples. Also, only those with a high-deductible health insurance plan are legally allowed to have an HSA. A high-deductible plan must have a deductible of $1,300 or more for individuals and $2,600 for families.

How do you save and pay off debt? Do you struggle to do both?

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