Having too much debt can hold you back on other financial goals, such as building wealth and saving for retirement. If having debt feels inevitable, it doesn’t have to be — you can take steps to pay it down while still planning for the future.
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Experts explain that it’s more than possible to manage debt repayment and wealth building simultaneously by following a few key strategies.
1. Prioritize Debt Before Investing
Paying off debt should largely come before investing, according to Jay Zigmont, Ph.D., a CFP and founder of Childfree Wealth.
“When you pay off your debt you effectively get a risk-free, tax-free return of the interest you avoid,” he said. Considering that the average stock market return is somewhere between 7% and 10%, paying off a credit card that charges more than 20% interest offers a much higher return, he explained.
“Remember that your net worth is everything you own minus everything you owe. When you pay down your debt, you raise your net worth just like you would by saving and investing.”
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2. Don’t Press Pause on This Expense
Of course, if you’re pausing some expenditures or contributions to free up more money for debt repayment, there’s one that you shouldn’t necessarily pause: putting money towards your retirement plan, especially if it’s offered by your employer, according to Andrea Woroch, a consumer and money-saving expert at Andrea Woroch.
“Many employer-sponsored retirement plans offer to match your investments, usually for up to 3% of your salary,” she said. “You don’t want to miss out on this free money, so you should still consider contributing at least enough to get the full match — even while working to pay off high interest debt.”
3. Reduce and Renegotiate Monthly Bills
Many Americans are living paycheck to paycheck these days, so finding extra cash to pay off debt or boost investment and savings can feel impossible, Woroch said.
“However, there are steps you can take to reduce your monthly bills you may not have thought about. Every bit you save can go toward your debt repayment — and eventually to savings and investments.”
Woroch recommends:
- Reviewing your mobile data usage and switching to a lower tiered plan if you’re overpaying.
- Negotiating bills with current service providers and asking about new promotions.
- Signing up for e-billing or autopay, which may offer small discounts, or using apps like BillCutterz that will haggle for you.
- Bundling insurance policies and increasing your deductible to save up to 20% on monthly premiums.
- Reviewing your subscriptions and canceling the ones you don’t need or use.
- Cutting back on streaming subscriptions too and using free options through your library app.
- Picking up a side hustle for additional income.
4. Build an Emergency Fund
Even while paying down debt, contribute whatever you can — even as little as a few dollars per month — to an emergency fund, Woroch advised. While the goal is to save up three to six months’ worth of living expenses, every little bit counts.
You should treat this account as emergency-only and keep it in a separate account from your regular checking or savings account.
Better yet, store it in a high-yield savings account, which offers a higher interest rate than a traditional savings account, so your money works harder for you, Woroch suggested.
5. Avoid Lifestyle Inflation
One trick to speed up emergency fund growth is to avoid lifestyle inflation when times are good, said Chris Motola, special projects editor and financial analyst at NationalBusinessCapital.com.
“Obviously, people want to enjoy their higher income, but if you’re spending all of your gains, you aren’t really improving your economic resilience,” he said. Motola noted that overspending can leave you just as vulnerable financially as you were when you earned less.
6. Utilize Smart Budgeting
The right budget is the one you can stick to. Woroch likes the zero-based budgeting method, which tracks where each and every dollar goes. “You know exactly how much you have to spend on very specific expenses such as groceries, entertainment, gas, etc.”
Jeff Hofmann, head of retail lending at PNC Bank suggested the 50/30/20 rule of budgeting. It’s a straightforward approach that divides take-home pay into needs, wants and savings.
- 50% for needs
- 30% for wants
- 20% for savings or debt repayment
“This method maps out a strategic structure without overly complicating it,” Hofmann said.
If that feels too rigid, he said a strong alternative could be the 80/20 method, with 80% covering both needs and wants, and 20% going to savings and debt repayment.
7. Review Interest Rates and Refinancing Options
If you’ve got one high-interest credit card, you don’t have to be stuck with it, Hofmann pointed out. “Regularly reviewing loan and credit card interest rates can help uncover opportunities to lower monthly payments and potentially pay off debt quicker.”
Credit card balance transfers with 0% introductory rates or debt consolidation loans that offer lower fixed rates can reduce interest costs. Even refinancing personal or auto loans can yield savings.
While these strategies may offer only temporary relief from interest, they allow more of each payment to go toward the principal balance — potentially accelerating your debt payoff. “These tools, however, should not be used as an excuse to take on more debt,” Hofmann cautioned.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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This article originally appeared on GOBankingRates.com: 7 Tips for Balancing Debt Repayment and Wealth Building
