For practically every person in the US, 2020 has been a difficult year. A pandemic, job layoffs, political turmoil, and confusion about the future. Most of us have discovered that we have way too much debt and not enough savings. As we go into 2021, what can we do to trim our debts and increase our savings so that we can ride out another possible year of upheaval.
So, what financial decisions can you make that could help you get out of debt and build up a savings account?
Start A Budget
Budgeting is tracking how much you are spending versus how much you are making and deciding where to cut expenses. We’ve detailed how to budget in
several of our articles so this will look at what to eliminate instead.
At each expense, ask how you can cut it down. Can you find a cheaper place to live? Is it worth refinancing your home? Do you have subscriptions for entertainment, apps, or gym memberships that you can cancel? Look over your cell phone bill and drop replacement coverage on older phones on your plan. Start taking lunches to work rather than ordering out. Spend time preparing and freezing meals for those days when you are too tired to cook.
The point of budgeting is to make certain you are spending less than you are bringing in. Which brings us to the next decision.
Pay Yourself First
When you get your paycheck, transfer a specific amount into your savings account. Your budget will show you how much you can afford to put aside. Part of this money should go into an emergency fund. We’ve discussed this topic in great detail, so the short version is that you need to build up a savings account with a balance that represents three months of your income. Obviously, that goal will take time, so start with a goal of $1000 and build it up from there.
Your emergency account is used for emergencies. This is not going out to dinner or vacation money. This is for medical, automotive, or job loss type emergencies.
Once you have an emergency savings account built up, you can adjust your insurance deductibles.
Insurance Deductibles
Take a few moments to check over your insurance premiums. Check to see if your car is adequately covered. Make certain that comprehensive reflects that actual value of your car. If you have comprehensive coverage for $10,000 but your car is worth $5,000, you won’t get the $10,000 if something happens to your car.
Another option is to increase your deductibles. This will cut your insurance premiums drastically. Just make certain you can cover the deductibles with your emergency account savings.
If you have several different types of insurance, you may be able to bundle all of them under one company and save money that way. For a deeper understanding of managing investments, consider reading
Investing 101: What You Should Know.
“Found” Money
If you get a raise or a bonus, try to put that extra into savings rather than allowing your expenses to expand to use up your raise. Squirreling away that money can help you build your savings more quickly. Once you have your savings built up, you can move on to the next decision. To further explore this concept, visit
The Importance of Having a Financial Mindset.
Paying Down Debt
As you save up money, use part of that to pay down your bills. Write down your debt, their amounts, and interest rates. Decide to pay off either the one with the highest interest rate or the smallest balance.
Then roll over what you used to pay on that bill onto the next one. Paying off the highest interest rate will save a lot of money you once paid for interest. Paying off the smallest balance will give you a feeling of progress.
It doesn't matter which one you choose as long as you are working toward a debt-free lifestyle. For more information, you can explore
Five Ways to Avoid Common Debt Mistakes, a resource that can complement the guidance offered in this section.
When paying down debt, using a structured strategy instead of simply paying minimums can save significant money on interest and help you become debt-free faster. Two of the most popular debt payoff plans are the debt avalanche and debt snowball methods.
- Debt avalanche method: Make payments in order of highest interest rate first, putting extra money toward that debt while paying minimums on the others. This helps reduce the total interest paid overall.
- Debt snowball method: Pay debts in order of smallest balance first, eliminating each smaller debt quickly to build momentum before rolling payments over toward the next largest debt.
Both methods offer benefits - the avalanche focuses strictly on math and total interest savings, while the snowball utilizes motivation through small wins.
Pacific Debt Specialist can analyze your unique financial situation and then develop a customized repayment strategy optimized for your needs. We'll create a step-by-step plan tailored to your budget and goals to help you get out of debt efficiently.
Contact us for a free consultation and start down the path to financial freedom.
Unload Junk
While you are cutting down on your expenses, try cutting down on your stuff. Sell or donate anything you don’t need or use. If you donate to a charity organization, you can make a realistic estimation of your donation and then apply it to your taxes. Talk to a tax professional to maximize your donation and deduction.
While you are unloading junk, don’t run out and buy more!
Buy Used
Another great way to save money is to look for gently used items. If you need a new car, a brand new one is generally a poor financial decision. The instant you sign the paperwork, your new car loses value faster than you can pay it off. Go for a decent two or three year old car and save a lot of money. The same goes for cell phones. Generally, the newest phone is not that much better than your current phone.
Tax Refund Adjustment
If you generally get a tax refund, consider talking to a tax professional and then adjusting your withholdings. This takes some planning so that you don’t get unexpectedly hit with a tax bill. By adjusting your refund, you may be able to increase your take home pay.
Alternatively, put your tax refund into your savings account and use it to cover emergencies and debt pay off. Sure it is not fun, but the relief from being debt free and having a cushion against future upheavals will more than make up for it.
Consolidate Debt
Consolidating debt means that you take out a loan to cover most of all of your existing debt and then pay off the loan. The catch is that you must get a loan with a lower interest rate than your current debt. The interest rate is based on your credit history so you may need to improve your credit history first in order to get the best rate.
You may be able to get 0% balance transfer credit cards to roll your existing credit card debt into. Just read the fine print because the 0% interest is not permanent and the subsequent interest rate may be higher than you are paying now. In addition, there are often fees associated with a balance transfer.
Side Hustle
If you are not already working two or three jobs, consider adding another job. You may be able to dedicate 100% of your side hustle income to emergency savings or pay down debt. The second job doesn't have to be permanent! Remember to live within your budget and cut as many expenses as possible.
If you plan to work as a Lyft or Uber driver, be aware that it can affect your insurance rates. If you are so far in debt that these decisions don’t really make a dent, there is still a way out. In addition to popular side hustles like ridesharing and delivery driving,
Here are more ideas to earn extra money:
Freelancing
Leverage skills like writing, web development, design, virtual assistance, and more by freelancing online. Sites like Upwork, Fiverr, and Freelancer connect you with clients. The work you do is flexible based on your schedule and skills.
Tutoring
If you have teaching experience or expertise in academic subjects, tutoring students virtually or locally represents a steady side income stream. Sites like Wyzant and Varsity Tutors provide platforms and student connections.
Reselling
Selling used items for profit leverages online platforms like eBay, Facebook Marketplace, Poshmark, and more. Or seek out valuable antiques and collectibles at thrift stores and garage sales to flip for bigger returns. This takes an eye for spotting hidden gems.
Adding supplemental income sources, even temporarily, can provide a helpful boost to paying down debt faster.
Build and Maintain Good Credit
Your credit score plays a major role in your financial life. It impacts everything from loan interest rates to credit card approvals to even eligibility for apartments or jobs. Therefore, building and protecting good credit should be a priority.
Here are some tips:
- Check your credit reports: Review your credit reports from Experian, Equifax, and TransUnion at least once per year. Watch for any suspicious activity or accounts you don't recognize, and dispute errors right away. You can obtain free annual credit reports through
AnnualCreditReport.com.
- Pay all bills on time: Payment history is the biggest factor affecting your scores. Set up autopay or payment reminders to avoid missed payments. If you do pay late, contact creditors quickly and ask if they can waive late fees.
- Keep credit card balances low: High credit utilization is damaging to scores. Try to keep individual card balances below 30% of the credit limit, and overall utilization under 10% if possible.
- Become an authorized user: Ask a family member or friend with good credit to add you as an authorized user on one of their longest-held credit card accounts. Their positive history can help strengthen your credit.
If you follow these credit-building rules consistently, your scores will gradually improve over time. Higher scores open the door for better loan offers, potentially saving thousands of dollars over the life of large purchases like cars and homes.
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