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Balancing Saving and Paying Off Debt: A Guide by O1ne Mortgage

If you find yourself overwhelmed by debt, you’re not alone. According to recent data from Experian, the average consumer carries $5,910 in credit card debt. You might be wondering whether to prioritize paying off debt or building your savings. The good news is, you can do both simultaneously with a well-organized financial plan. Here’s how.

Should You Save While Paying Off Debt?

Ideally, your budget should allow for both saving and debt repayment. Here’s why it’s important:

Emergency Fund: An emergency fund acts as your financial safety net. It can cover unexpected expenses, from minor home repairs to job loss. Aim to save three to six months’ worth of expenses.

Investment Gains: Delaying savings until you’re debt-free can cost you years of compound interest, which is crucial for growing your retirement fund.

Good Debt: Not all debt is bad. Student loans can enhance your career prospects, and a mortgage can help you invest in a home that appreciates in value.

How to Balance Saving and Paying Off Debt

Here are some tips to help you manage both:

1. Get Organized With Your Finances

List all your debts, including interest rates and minimum payments. Revisit your budget to account for essential bills, debt payments, and discretionary spending. Track your spending to identify wasteful expenses and determine how much extra income you have each month. Ideally, allocate 20% of your take-home pay to financial goals, splitting it between saving and debt repayment.

2. Set a Savings Goal

Start by assessing your emergency fund. If it’s nonexistent, begin saving now. Set a manageable goal, like building a $1,000 mini emergency fund. Determine a timeline based on your monthly budget. For example, if you have $500 a month for saving and debt, you might allocate $100 to your emergency fund, $300 to debt, and $100 to a retirement account.

3. Choose a Debt Repayment Strategy

Consider these strategies:

• Debt Snowball: Focus on paying off your smallest balance first while making minimum payments on other accounts.
• Debt Avalanche: Prioritize the account with the highest interest rate to save money in the long run.
• Debt Consolidation: Take out a loan with a lower interest rate to pay off all balances, or use a balance transfer credit card with a 0% interest period.

4. Contribute to Your 401(k) to Get an Employer Match

If your employer offers a 401(k) match, contribute enough to get the full match. This is essentially free money that can grow significantly over time due to compound interest.

How to Avoid More Debt

To prevent accumulating more debt:

• Pay off your credit card balance in full each month.
• Stick to your budget and adjust if necessary.
• Automate your savings and build a strong emergency fund.
• Use cash windfalls, like tax refunds, to pay down debt and boost savings.
• Reduce expenses to avoid overspending.

The Bottom Line

You don’t have to choose between paying off debt and building your savings. With a balanced approach, you can achieve both. Reducing debt can also improve your credit score, which is a significant benefit. For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey.

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