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Will this interfere with your efforts to save?
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Putting money into a savings account is important for everyone. You’ll need some cash in a savings account for emergencies and for short-term purchases and you will also need to make sure you’re investing in a brokerage firm to accomplish long-term goals such as retirement.
But, it can be really hard to save — especially if you have current expenses you’re paying. Finance expert Dave Ramsey identified one such expense, which he has referred to as “the biggest money suck when it comes to saving.”
Could this expense interfere with your ability to save?
According to Ramsey, debt payments are the money suck that could prevent you from being able to save the money you need. That’s because, as Ramsey explained, debt “robs you of your income.”
Ramsey recommends aiming to become debt free as soon as you can so you can eliminate this obligation and have more of your hard-earned money to put towards accomplishing the financial goals you have set for yourself.
“Once your income is freed up, you can finally use it to make progress toward your savings goals,” Ramsey said.
How can you make sure debt doesn’t interfere with your financial goals
Ramsey is 100% correct that if you have a lot of debt payments, it’s going to be harder to be successful at accomplishing savings goals. When you borrow, you commit future income you haven’t even earned yet to covering yesterday’s expenses. You cut your paycheck down before it even comes, so you have less money to live on — and to save.
But, it’s important to distinguish between different kinds of debt, as some types of loans can actually be a good thing if they improve your ability to earn money or if they help you grow your net worth. Taking out a business loan that enables you to increase your earnings wouldn’t necessarily rob you of future income if it increased how much you can earn.
What you want to avoid is debt that doesn’t improve your financial situation and make savings goals easier for the long haul. This would be things like credit card debt or personal loans taken out for vacations or for any unnecessary purchases that aren’t critical to make.
You can avoid taking on this kind of debt by making a budget that enables you to spend less than you earn — and sticking to it. Setting aside some money for emergencies so you don’t have to charge them can also help, as can keeping your fixed costs (like housing expenses) low so it’s actually easier to live within your means.
How to pay off debt
If you have already borrowed, Ramsey recommends using the debt snowball method to become debt free ASAP. This would involve making extra payments on your loan or credit card with the lowest balance until it’s paid off, then putting all those extra payments towards the one with the next lowest balance until you’re done.
You could try this approach, or could use a similar strategy (the debt avalanche) to pay off your highest-interest debt first if you want to lower repayment costs as much as you can. Whatever method you adopt, paying down your debt and freeing up that money for saving as Ramsey suggests could definitely help to make accomplishing your goals easier.
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