You may have done everything that financial experts told you to do, only to have it backfire. The consumer who opened numerous credit card accounts to build a good credit rating discovers that the fall-out of the recession resulted in higher interest rates and increased debt. With financial experts placing emphasis on both saving and paying off debt, the cash-strapped consumer who lives from one paycheck to another may wonder how both are possible.
Paying Off Debt
Credit.com recommends using two different strategies of paying down debt, both of which involve applying the money you have left over at the end of the month to a specific debt until the account balance reaches zero. You may choose to pay down the debt with the highest interest rate first, then the balance with the next highest interest rate. Alternately, you may choose to target the debt with the lowest balance first and then move on to the next lowest balance and so on. Although both of these methods result in ultimately getting rid of debt, when every penny is directed to a personal debt management plan, this leaves very little room to save.
Emergency Savings
A 2008 survey conducted by the National Foundation for Credit Counseling (NFCC) in conjunction with MSN Money indicated that most people did not have an emergency savings fund (three to six months of saved income). MSN Money's Liz Pulliam Weston takes a more conservative approach, advocating having at least $500 in emergency savings. The NFCC notes that building a savings account can be accomplished by looking at your budget and trimming a set amount from your variable expenses, such as those spent on recreation, eating out, clothing and other non-necessities. For example, trimming $10 from $12 variable expenses yields $120 in savings, which over time can provide good financial padding in times of financial duress. But what about the consumer who's already trimmed his budget down to the bare bones in effort to pay down debt using one of the methods above--is it possible to save?
The 50 Percent Mark
Weston suggests that the inability to save and pay off debt at the same time may be due to one factor alone: when the total costs of your basic living expenses surpass 50 percent of your take-home income after taxes. Necessary living expenses include rent or mortgage, utilities, car payments, food and insurance payments. According to Harvard Warren, who co-authored "All Your Worth," if the amount of your basic expenses is prohibitively high, you'll never have the money to save or pay off debt, much less afford the items on your personal "want" list, such as vacations and the occasional restaurant meal.
Hard Choices
Adjusting your standard of living so that you live comfortably within 50 percent of your post-tax income can require making less-than-comfortable choices. Taking on a roommate, selling one of the family cars, changing health insurance plans or moving to a less expensive rental home may not be welcome options, but they can help you pay off debt. Other ways of getting debt out of the way so you can begin to save include taking a second job or selling some of the items you own on eBay or in a garage sale. Dual-income couples may work different shifts to avoid paying for child care. Weston also notes that older children can take jobs to help out with the household expenses as well. "No part of your spending should be considered off-limits for possible cuts," she states.
Getting Help
If you're in debt and without any savings to spare, you're far from alone. In a June 2009 MSN Money report, NFCC spokesperson Gail Cunningham stated that the average consumer who sought help had six credit cards with unsecured debt that surpassed 62 percent of their total yearly income. Credit counseling organizations offer budgeting and personal money management services, as well as structured plans by which consumers can repay their debts. If you need help managing your money, contact a member agency of the NFCC to schedule an appointment with a credit counselor near you.
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