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Managing debt and saving money—at the same time
Welcome back to The onUp Challenge. My name is Tim Thompson, and today we're going to talk about saving and managing your debt and how to do both of those. What's more important? Should I save or should I pay off my debt?
Today we are going to talk about that and you’re going to find out.
The first step that you need to take in that process is to create an emergency account. It's an account set aside specifically for financial emergencies.
Research shows that when people have money set aside for emergencies, they're more confident in their finances, and they make better decisions financially. Knowing that that money is set aside allows you to focus on the things you care most about.
You want to go create an account, and you really want to separate that from your other accounts. And there's really two goals that you should have. Your first goal should be to reach $1,000. Once you get to that point, you should then focus on three months of living expenses, but you really want to set a goal for yourself on how much you can actually save every month, and some of us, that might be $25 a month. Others, it might be $250 a month, but you want to set a goal, determine how much you can actually save, and then you want to automate that process.
If you automate it, it's going to happen. It's on autopilot. You don't have to think about it. You can then focus on managing your debt.
Most of us have consumer debt. I don't want you to beat yourself up because, again, it's important that we utilize our available lines of credit to enjoy life, but the key is managing it properly. You do that by making a list of your debts. You put them into two categories.
Debts under $1,000 and then debts over $1,000. You want to take the top category, debt's under $1,000 and you want to sort those debts from largest to smallest balances. The second category—debts over $1,000—you want to sort those from largest to smallest interest rate. The reason that you do that is because you want to take all of your small debts and create some momentum by getting rid of them quickly.
Let’s say, for example, that you had three credit cards and you had balances under $1,000. Three hundred, five hundred, and seven hundred dollars balances on those cards. Let's say your minimum payment on each of those cards is $25. So you're paying $75 a month just in minimum payments. Now you take that $300 debt cause it's the smallest debt regardless of the interest rate, and let's say you can throw an extra $75 a month at it. Well, in three months, it's going to be paid off. Now you've freed up the $25 plus the $75.
So now, you have an extra hundred that you can throw at that second debt, and now you're putting $125 a month towards that debt. Within a few months, it'll be paid off, and then you roll that to the third debt, and now you're paying $150 a month and pretty soon, it's going to be paid off. It's like a snowball effect. Eventually, you'll get a lot of momentum with that, and as you pay those small debts off, then you can get to the larger debts, and then again, that category should be broken up or categorized by interest rate—highest to lowest interest rate.
My challenge for you today is to simply do this: Go create your financial confidence account, set your goal, and then automate it, and then create your debt elimination plan and get your debts organized so that you can attack them and get out of debt.
Financial confidence comes down to taking care of what you can control, and when you're controlling and managing your debt, it allows you to enjoy life. It allows you to focus on the things you care most about, your values, and when a person is able to focus on the things they care most about, they're fulfilled in life.
This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.