Savings and debt

Building a Savings and Debt Payoff Plan

The first step is to know where your money is going. Take a look at what you are paying monthly. There are fixed expenses like rent and utilities and then there are flexible expenses like groceries and a new pair of shoes.

American household debt balances just hit a record high of $17 trillion last month and credit card balances reached $986 billion last quarter. The debt is real. These are BIG numbers, but whatever amount of debt you are carrying, the good news is it IS possible to make financial progress when you have debt. Let’s dive in and start clearing debt today!  

Where is your money?

The first step is to know where your money is going. Take a look at what you are paying monthly. There are fixed expenses like rent and utilities and then there are flexible expenses like groceries and a new pair of shoes. 

Also, are you carrying any debt? FYI- it is important to note that not all debt carries the same weight. For example, borrowing money for student loans so you can attend college may increase your net worth over time. If you have federal student loans vs private loans, they’re likely to be loaned to you at a much lower interest rate. In contrast, credit cards typically have high interest rates- upwards of 30%! Personal loans may carry a slightly lower interest rate, but knowing what you are paying is key.

Find Your “Future” Number

No, the next step doesn’t require a course in astrology. We call this your “Future” because it’s the money you can direct toward improving your future, whether that’s building savings and paying off debt. Your Future number is 20% of your take home pay- how much are you taking home every month.

Determine Your Debt Number

Revisit that list of debts you outlined above and add up all the minimum payments. This is your monthly minimum payment amount.

Determine Your Monthly Essential Savings Contribution

Subtract your monthly minimum payments from your Future number. The remainder is your Essential Savings contribution. Our goal is to reach $2500 in Essential Savings. You can automate your savings contribution in The Beans app or open a savings account and set up an automatic contribution. Automation is key because “automation is the new discipline”. When your savings transfers are automated you don’t have to think about it, act on it, and you’re more likely to hit that savings goal faster!

Celebration Break!

When you reach each $500 milestone, celebrate! If you already have $2,500 in cash savings, go ahead and celebrate now!

Apply the “debt snowball” method

Now that you have your Essential Savings set, add that to your smallest debt’s minimum monthly payment. Don’t change your other minimum payments or remove the minimum you’re already contributing. This is the debt snowball method in action!

Why the snowball? Research shows that individuals are more motivated to get out of debt when using the debt snowball method. Once your smallest debt is paid off, shift that same Essential Saving contribution plus the minimum you put towards your smallest debt and add them to your next smallest debt. You’re picking up momentum! Keep it going until all of your debts are paid off.