When money is tight, it can feel like you’ve got to make some hard choices: pay off debt or bulk up your savings account. It can be tough to make progress on your money goals when funds are tight, but you don’t have to choose: you can learn how to pay off debt while saving money.
With the right approach, it’s possible to make steady progress on both fronts at the same time. In this guide, you’ll learn why it’s smart to tackle debt repayment and savings balances at the same time, plus get an actionable six-step plan to make it a reality.
Why Balance Debt Repayment and Savings Balances?
Finding the right balance between paying off debt while saving is one of the smartest financial moves you can make.
Both strategies support long-term financial stability in different ways:
- Reduce interest payments: Paying down debt now means you’ll spend less on interest over time and free up more of your future income.
- Build a safety net: Having savings on hand keeps you from relying on credit cards or loans during emergencies, so you don’t dig yourself deeper into debt.
- Feel less financial stress: Managing money with debt, while setting money aside for savings, can ease money-related anxiety and give you peace of mind.
- Protect your long-term plans: With smart budgeting for debt and savings, you won’t have to pause milestones like saving for a home, paying for college, or growing your retirement fund.
How To Save Money While in Debt
It might feel impossible to tuck money away when you’re already juggling payments, but saving and paying down debt is possible. Follow these steps for building savings while reducing debt.
1. Do a Little Financial Recon First
Before you can successfully start paying off debt while saving, you need a clear understanding of your finances:
- List every debt you owe: Write down the balance, interest rate, and minimum monthly payment for each loan or credit card. This helps you see which debts are costing you the most and where to focus your repayment efforts.
- Review your monthly income: Add up all income so you know exactly what you’re working with.
- Calculate your essential expenses: Identify what you absolutely have to spend each month (housing, utilities, food, transportation, insurance). Subtract this total from your income to figure out how much is left for building savings while reducing debt.
- Track your current savings: Note your emergency fund or other savings account balances. This gives you context for how far you need to go and helps you strike a healthy balance between debt repayment and savings.
2. Create a Balanced Budget
Now you have a much better idea of your financial situation. Create a flexible, personalized budget that works with your finances, not against them:
- Decide how to split your income: Start by covering your essentials, then allocate what’s left between debt payments and savings. If your debt is high-interest or urgent, you might dedicate 60 to 70% of leftover funds to repayment and 30 to 40% to savings.
- Use percentage ranges instead of fixed amounts: Building your budget as a set of percentages (rather than dollar amounts) gives you flexibility if your income changes.
- Always include emergency savings: Even if it’s just $10 per paycheck, it’s helpful to set aside money for an emergency fund. This small cash buffer prevents you from racking up new debt when unexpected expenses pop up (and they always do).
3. Pick a Debt Repayment Strategy
Now that you’ve set up a budget, it’s time to choose how you’ll actually tackle your debt. Two of the most effective approaches are the snowball and avalanche methods:
- Snowball method (emotional boost): Focus on paying off your smallest debt first while making minimum payments on the rest. Once that first balance is gone, tackle the next debt. This method creates quick wins that build momentum and help reduce the stress of managing money with debt.
- Avalanche method (financial efficiency): Target the debt with the highest interest rate first while still paying minimums on everything else. This strategy minimizes how much you spend on interest over time.
You don’t have to go all in on debt repayment, either. If money is tight one month, stick to minimum payments temporarily and direct the freed-up cash to your emergency fund.
4. Cut Expenses Where You Can
Earning more is great, but if you need to find extra money to tackle debt and savings, the best place to start is with your expenses. Cutting costs creates breathing room in your budget, allowing you to focus on paying off debt while saving a nest egg for your future self.
Try cutting expenses by:
- Negotiating recurring bills: Call service providers (internet, phone, insurance, streaming) and ask about lower-cost plans, loyalty discounts, or promotional rates. Even a small drop in monthly bills can strengthen your debt repayment and savings balance.
- Automating cashback and price checks: Use browser extensions or cashback apps that find lower prices or reward you for purchases you’re already making. These smart budgeting for debt and savings tools help you trim spending without cutting out necessities.
- Ditching subscriptions: Review everything you’re paying for monthly or annually. Cancel anything you rarely use and pause non-essential services.
5. Adjust Your Plan if You Need To
Even the best financial plan isn’t set in stone. Life changes, and sometimes your original approach to paying off debt while saving just stops working.
You might need to change your plan if your savings hasn’t grown in months or if you’re only making minimum payments on your debt. And that’s okay! Your financial freedom plan is a tool to help you, not make you feel guilty.
6. Celebrate Your Hard Work
Paying off debt while saving isn’t easy. Don’t you deserve a little recognition for your hard work? We think so.
Celebrate your wins with low-cost rewards like a fancy coffee, your fave takeout meal, or a guilt-free afternoon off from chores. These treats help prevent burnout while still supporting your financial planning for debt payoff.
Debt Down, Savings Up
Learning how to pay off debt while saving money can feel like a challenge at first, but you’ve got what it takes. Instead of choosing one goal over another, you can tackle both issues with the right plan. With consistent effort and smart budgeting for debt and savings, you’ll build an emergency cushion, reduce debt, and feel more confident in your financial future.
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