The consequences of borrowing too much money can haunt you for years to come.
“Debt can rob you of your future because you are using the money you earn today to pay off things from the past,” said Andrew Lokenauth, an investing and banking professional who held senior positions at Goldman Sachs, AIG and other major institutions. “And if unpaid, debt can grow larger and larger with interest and fees adding up. Debt can also cause a lot of stress.”
It’s not just big stress like the danger of foreclosure or bankruptcy. Debt puts the squeeze on all those little luxuries that make life more bearable — that extra streaming subscription, your monthly massage and even that daily latte that gets you through the grind.
The good news is that you don’t have to choose between paying your debts and enjoying the little things. Here’s how to do both at the same time.
Although it might not seem that way before you have your daily caffeine fix, paying your debts is more important than coffee — but with the right strategy for the former, you won’t have to forego the latter.
“In terms of paying off debt, I use the debt avalanche method, which is the better method for saving money in the long term,” said Lokenauth. “This method focuses on paying off balances with the highest interest rates first. Because of this, this method results in paying less interest over the life of the loan because you are focusing on paying off the debts that carry a higher interest rate. Mathematically, it makes sense to pay off debt first that charges a 21% interest rate over debt that is only charging a 4% interest rate.”
No matter how much you owe, money for small splurges will be easier to find once you get organized with a budget — and when you get down to the nitty-gritty of what’s coming in and what’s going out, you might just find that you’re wasting all you need to fund your Starbucks habit on monthly subscriptions that aren’t worth paying for.
“Many people make the mistake of not examining their actual expenses when they set up their monthly budget,” said certified management accountant (CMA) Nathan Liao, founder and CEO of CMA Exam Academy. “This can really drain their budget, as they may be unknowingly paying monthly subscriptions for publications they no longer read, mobile apps they no longer use, streaming services they no longer watch, etc.”
For many people, those pricey cappuccinos feel a whole lot pricer during certain times of the month. That’s because the natural ebb and flow of bills and income create budgetary peaks and valleys — but you can even out your buying power between pay periods.
“Generally, people schedule bills for the first or last day of the month,” said Chad Wyatt, owner of the coupon and deal site Dealorium. “However, that means a huge sum of money comes out at once. Try to spread them evenly throughout the month so smaller amounts need paying, and extra time is then allowed to earn more money if possible. Also, depending on the bill, if you have the money, pay it off annually. This way it is a huge weight removed from any monthly constraints.”
Cutting out small luxuries has long been standard personal finance advice for anyone looking to save money or eliminate debt. But existing to pay the piper without really living is not the only way to clean the financial slate.
“Create a budget and cut extraneous expenses,” said Julie Ramhold, consumer analyst with DealNews.com. “No, this doesn’t mean cutting out your daily latte. If that’s an easy change to make, then sure, go ahead, but be realistic about how much that’ll save you and how fast. Try to cut from more expensive areas of your budget. For instance, see if you can downgrade your cell phone plan, or share the bill for a streaming service with friends or family. Cut back on dining out and seeing movies, but not entirely. If you’re doing those things a few times a month, cutting back to once will allow you to still have fun but also enable you to save cash.”
Round Up Your Coffee Budget
The thing that makes little pleasures so great is that they’re little — and attainable in most cases with little more than pocket change, or at least its digital equivalent.
“Consider looking into a round-up program,” said Ramhold, who added that many banks now offer their members the ability to automatically sock away the nearest-dollar difference from all their purchases. If you buy something for $5.60, your bank rounds up the purchase to $6 and sets 40 cents aside in a separate account. That separate account can be the fund for your lattes or whatever your guilty pleasure happens to be. Although you’ll slowly and steadily set money aside, it will be in barely noticeable increments that won’t impede your ability to pay off your debts — and once you do that, you can drink all the lattes you like.
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