Each day that ticks by, I owe another $9.54 in interest charges on my debt, according to my Ready For Zero plan. It’s a sobering truth, and one that constantly motivates me to work harder to pay off my debt faster.
There’s another problem, though: I also don’t have a lot of savings.
Here is a highly scientific chart that sums up the situation:
It doesn’t take a rocket scientist to figure out that I need to work on both ends of the equation: boosting my savings and decreasing my debt. I can’t just fling all my money towards my debt like an out-of-control tennis ball machine, as tempting as it is.
Here’s our game plan for how to balance saving vs. paying off debt, and why we chose to focus on each aspect at different stages in our debt-payoff journey.
Step One: Figure Out How Much Leftover Money You Have Each Month
We’ve been bringing home an average of $6,678.66 per month, for the past year.
Our monthly expenses (bills, debt payments, and living expenses) total $5,149.72, including our mortgage for the house we’re giving up.
Related: Budgeting For Budget Haters Course
This means that right now we have an extra $1,528.94 left over each month. Once we give up our house and don’t have to worry about paying the mortgage too, we’ll have even more: $2,765.59. Here’s how it breaks down:
$1,528.94 is what we have to play with to meet our goals. This is what we’ll use to save for our future and kick debt’s ass. Now we just need to figure out what to do with it.
Step Two: Take Stock Of Where You’re At Now
Before you can move ahead, you need to know where you’re at now.
Ask yourself two things: Do you have any emergency fund savings at all? Are you comfortable with that amount of savings for now?
Related post: How Big Should My Emergency Fund Be?
We currently have one month’s expenses saved up. We’d like to have more (and we’ll work towards that), but given the debt we have to pay off and how much we want to save, we’re comfortable with one month’s expenses for the time-being. It gives us just enough breathing room for now.
If we didn’t have this much, we would make it our first priority to save up one month’s expenses.
Step Three: Create A Savings Plan
By this point we’ve already met all of our minimum debt obligations. The bills are paid, and we have a roof over our head for another month.
Now we need to pay ourselves. We needed to come up with a savings plan based on what was important to us. We sat down and had a lengthy discussion over a fine craft brew on what we wanted, and where we wanted to go in the future.
Our savings plan is based on two things: A savings cap that reflects when we’ll stop saving towards a goal, and a monthly contribution amount. We decided on a savings cap and a monthly contribution amount for each of our goals based on how important or time-sensitive a particular goal is to us.
Here’s what we came up with:
F$%k Renting: $50,000 cap, $100/month contribution, $1,372.39 saved so far
We both really want our own house despite our past home-ownership problems. One of the main problems was that we didn’t have a down payment the first time; we won’t be making that mistake again.
Travel: $10,000 cap, $50/month contribution, $88.92 saved so far
We don’t have any trips in mind, but if an opportunity comes up, we want to be able to pay for most, if not all, of it.
Bonus: if we don’t use it, by the time we reach the cap we’ll be able to take one hell of a vacation!
Truck Replacement: $15,000 cap, $100/month contribution, $1,100.49 saved so far
I’ve been without a car for the first time in my life since I got my driver’s license. It’s been a difficult yet money-saving transition for me. Eventually we’ll be moving to a more remote location, and for that I’ll need a vehicle.
Car Repairs: $3,000 cap, $100/month contribution, $1,000 saved so far
Our one remaining vehicle is in great shape now, but it is thirteen years old and will probably need more repairs in the future.
We set the cap at $3,000 because this is the largest repair bill we’ve ever faced. Hopefully we won’t see a larger one in the future.
Side Hustle Taxes: 30% of my freelance income, $2,201.08 saved so far
One of the lesser-touted aspects of doing freelance work.
Pets: $1,500 cap, $120/month contribution, $164.57 saved so far
We have three animals who are rapidly approaching geriatric age and will likely need more veterinary care in the future. Zach has been less-than-delighted to find that he is developing gray hairs at approximately the same rate as our dog, Juno.
Birthdays: $300 cap, $50/month contribution, $250 saved so far
We decided on a rule: neither of us is allowed to spend more than $200 on a birthday gift for the other person. That way, with the monthly contribution rate, this savings goal will be fully-stocked by the time the other person’s birthday comes around.
Christmas: $400 cap, $33.33 monthly contribution, $400 saved so far
We mostly just buy gifts for each other. We’re not hugely festive people and so this is an easy area where we can save money. We could probably scrap this category altogether, but we like getting presents.
Health: $5,000 cap, $150/month contribution, $300 saved so far
We picked a $5,000 cap as a completely arbitrary number. I am currently in the process of being hired on to a new position with benefits. Once we’re able to find out what our yearly deductible is, we’ll set that as our savings cap.
If I’m able to get a high-deductible health insurance plan, we’ll be parking our monthly contributions in a Health Savings Account to take advantage of tax savings.
Retirement: No cap, $50/month contribution to separate Roth IRAs, $110.10 and $109.79 saved so far
We both don’t have access to employer-sponsored retirement savings plans right now. Instead, we both just started up our own Roth IRAs for the first time in our lives.
Our goal is to drastically ramp up our savings once we’re in a better financial position, but we still want to contribute some amount now, even if it’s not much.
The Final Tally: We’re saving $803.33 per month (plus 30% of whatever freelance income I make).
That’s a lot of money to be saving, especially when we’re in so much debt. After living on the edge for so long, though, we both need a bit of financial stability before we can move on.
It’s hard to fight a debt monster when you’re standing on quicksand. Better to fight on concrete.
Step Four: Develop A Game Plan For Remaining Leftover Income
Here’s our plan for our monthly income so far:
After we pay our monthly expenses and put money into savings, we have an extra $725.61 left to play with.
What to do with it?
We discussed the possibilities and decided on the following steps, in order:
- Pay off the credit card debt left over from a home repair
- Save up two month’s worth of expenses in a general emergency fund
- PAY OFF REMAINING DEBT, MOTHAF@#$%R!!!
Paying off our credit card is our first priority because it charges outrageous interest rates and frankly, I’m ashamed I even have credit card debt at this point. I’ve made it a point of pride for the past year that I always pay off my credit card within a few days of the purchase.
We got suckered into carrying this debt because we used it to pay for a house repair, thinking we could pay off the debt as soon as we sold our house. We didn’t sell the house, and so we couldn’t pay off the debt.
Next, we want a bit more of a solid financial footing. Zach is currently in school and his jobs in the construction industry are notorious for starting and stopping abruptly.
Finally, we need to kick our debt to the curb!
The Benefits Of Balancing Savings Vs. Debt
A lot of people say that you need to focus on paying off debt at any and all costs, especially if you’re in as much debt as us. Dave Ramsey advocates saving just $1,000 before going into hardcore-debt-payoff mode. My, what cute little emergencies he must have.
As for me, I’ve been battling emergency monsters the size of which would make Cthulu squeal and run away. Take the time we got a home repair bill for $7,865, or a doctor’s bill for $12,000, for example.
It’s about time we had some stability in our life, and so we decided to place a heavy emphasis on savings. After we have a solid base to work off of, we’ll be moving full-on into debt-payoff mode with our extra earnings.
You Have Options
Paying off debt or saving money shouldn’t be an either-or choice. You can do both, and place a stronger emphasis on either side of the equation depending on your current situation. Your situation will change, and you can adjust accordingly.
We’ve tailored our plan into a fine science, but you don’t have to go this in-depth if you want. We’re just gluttons for numbers and punishment.
As long as you’re working to balance the two in whatever way you see fit, you’ll be better off in the long run than where you started.
How do you balance savings vs debt? Leave a comment below!