This is probably the 20th time, I believe, that I have sat down to discuss how to pay off debts and how to save at the same time.
And, I very well know, that in future, I will have to revisit this topic again and again and again….. for, this is a never ending discussion.
You start with debt payments, then you enter into savings, then you talk about investments, and then how to maximize your savings,.. and the conversation is stretched to infinity!
To break the ice, however, let me assure you, that you can pretty easily manage both debts and savings at the same time!
It’s all a matter of time, and picking out the correct form of budget that goes well with your personal monetary situation.
So, without any further delay, let’s find out.
What budget should you follow to tackle both savings and debts together.
- 50-20-30: the most basic form of budgeting-
This might be a novice budgeting strategy, but it has forever proved to be very useful for people who are just starting out to sort their money matters.
In this budget you will be dividing your paycheck into three distinct parts. Each part will be marked as 50%, 20%, and 30% of your salary.
The first part of your salary, the big 50%, is for the high priority expenses like household bills, groceries, transportation costs, debt payments and so on.
The next 20% of the salary is for your savings. This part, my friend is mandatory. I would suggest you, that if you plan to go for this budget, then the moment you receive your paycheck, you first keep aside this 20% for savings!
The final 30% of your salary is used for luxury and extra expenses, that are not deemed to be important as a part of livelihood or finances.
But, if you feel that you can halt an expensive lifestyle for the time being and can do well without spending this 30% on luxury expenses, then use it to make extra debt payments or extra savings! Know how to easily get to a grip on your personal finances.
2. Reverse budgeting technique: for advanced money management
This is the next level of budgeting you should apply, when 50-20-30 budgeting fails to accomplish both debt payments and savings simultaneously.
In reverse budgeting, you first separate out your preferred savings amount from the paycheck. Then, with whatever’s left of your salary, you use it for day to day expenses and other important obligations such as debt payments or utility bills.
Well, I call this an advanced level budgeting because you need to be smart enough to list your expenses as per the priority list you create.
Another thing is, this budgeting will only turn out to be successful if you can exhaust your whole salary in your ‘expense priority list’.
You got to be wise in predicting all your future expenses for the month, and accordingly allocate each expense their set dollar amount!
You keep on listing your expenses one by one.
Once you believe that you can’t add anything more to the list, you will then calculate the total amount your expense list is adding up to. This amount you will have to subtract from your salary and see whether or not the result is zero!
If it’s zero, then it’s a job done well, and if not, then you can use the remainder from your salary for extra debt payments or more savings, same as stated above in the 50-20-30 budgeting.
3. The customized form of budgeting: that includes ‘increasing your income’, ‘planning a suitable debt payoff method’, and ‘practicing frugal living’, depending on your personal financial status-
This is the most precise form of budgeting technique, that you will create on your own, based on your exclusive financial condition.
Sometimes, debts just don’t seem to go away with a normal budget, and doing savings while having huge debt amounts can become a top-notch difficult task.
That’s when probably you wish that only if you could find out some ways to have more income, or an effective way to wash away debts.
Many people, when in such dire straits, choose bankruptcy and spend the rest of their life doomed, by trying to recuperate from such devastating events.
But, I would suggest you to have a calm mind, and sit down to sort your finances!
If your debts are impossible to tackle, like say they are handed onto collections, or too much of interest rates that only seem to grow with time, then mate trust me, you will have to get out of debt fast!
So, you need to choose a good debt relief options. A debt relief option or a program can range anywhere from debt settlement, debt consolidation, to bankruptcy! Not intended to scare you, but for many bankruptcy does become the last resort.
However, if you are smart enough to get hold of a good debt relief program at the right time, then you might be able to avoid the monstrous bankruptcy!
But the issue is still not solved.
You are taking care of debts, but what about savings, our vital part of discussion?
You need to pull brakes and practice frugal living! If you don’t do that, then you can never bury debts and start to plant savings!
By frugal living, you will have to cut on credit card usage, lower your grocery bills, avoid eating outs and partying….. and do anything that helps you to save on lifestyle costs.
And, all the money you are saving, push it away into a savings account, and see it grow on interests!
An extra handy note on types of debts and how to treat them differently:-
Remember that there are two unique forms of debts, in general.
One is a secured debt and the other is unsecured debt. They both are important and they both demand different payoff strategies.
Secured debts are the ones that have collateral or assets attached to them. Say for example, a mortgage or an auto loan!
If you fail to do your payments, then the lender will straightaway take the house or the car from you.
But the best part with secured debts is that, they give you time to pay them off slowly, unlike unsecured debts.
Unsecured debts on the other hand, are those that can be referred to as consumer debts. These are credit cards, personal loans, payday loans, and so on. They don’t have any asset as backup!
When it comes to instant relief from debts, you should concentrate on unsecured debts. They are the ones that are usually handed to collection agencies and carry the highest interest rates.
Therefore, I would ask you not to worry much about secured debts, rather focus more on the unsecured debts and plan to pay them off as fast as you can!
More about our guest blogger – Andy Masaki from PENNY LESS DAD
Hi everybody! Thanks for dropping by. This is my blog that I’ve just started and there is obviously a reason behind, which I’d try to describe later…obviously in this post. But before that let me introduce myself.
My name is Andy, mmmm, and I hail from Oakland, California. I have two kids – Jason and Sara. They are 7 and 4 respectively. And yes, my beloved wife, Stephanie. I’d definitely try to come up with a good family photograph of our later as she is dead against it right now. You know, privacy concerns. She is one of them who can bet anything for these. Ack, hell!!
I’m no blogger, neither I’m a writer. I’m a financial advisor by profession and I love doing my job. Once I read somewhere that in order to be a successful writer, you have to have the ability to think logically and express your reasons clearly and in a proper manner. I’ve always lacked that. I’ve always failed to write anything I wanted. My wishes, my thoughts, my desires, my experiences and everything else.
Perhaps it’s time to put down everything I ever wanted to share. Perhaps, it’d be in a haphazard way, but let it be. In spite of being a financial planner, I had to file for bankruptcy. No, this is no joke! I just cannot believe that I myself went at the threshold of bankruptcy while advising thousands of people with their finances.
I filed for bankruptcy in 2013. Just after my marriage, I became careless about my finances. My negligence grew when Jason and Sara came in our lives and filled us with everything we wished for. The trance of the momentary happiness was so intense that I couldn’t see the imminent chaos. It might be because of the fact that being myself a financial planner I was overconfident about my abilities to take care of my own finances.
Perhaps, you can now relate why it’s PennyLessDad. However, bankruptcy was a dark past that I’ve left behind, and today leading a debt free life with my family. It would never have been possible without my dear wife. Thanks Stephanie!
PennyLessDad is solely for what financial mistakes I committed, how I overcame those, and most importantly, what I learnt from them. I’ll share everything with you through my future blog posts from time to time and of course would try to come up with financial lessons to simplify your daily finances.