Debt

20 Easy Ways to Save Money Every Day

people-meeting at table-easy ways to save money

We all know it is easier to spend money than to save them. Spending money often gives us emotional comfort and became a habit. But changing your spending habits and finding new ways to save money can be a great thing for your financial life.

Learning how to save money can help you to reach your financial goals:

to buy a house
to pay off debt
to save for a vacation
put more money in your emergency fund
to save for retirement
to save for kid’s education

No matter what your financial goals are, this post has money-saving ideas for everyone. Start with a few of these suggestions and see if they work for you.

Here are 20 of my favorite ways to save money every day:

How to Save Money Through Money Management:

1). Pay your bills online.

There are many benefits of paying your bills online. I personally do not remember the last time I mailed off a check to pay our bills. By going online, you will not be using envelopes, stamps, and checks as much as it was popular in the past. Automation helps to save money and time and reduce the stress of money management.

We pay all our bills automatically. Our online payment is set up with a local bank and bills are paid out of our checking account. I just have to make sure I added money to that account before the bills are due. Even though I keep an eye on all our transactions, but I never have to worry about being late on bill payments.

2). Consolidate your credit cards debt.

Debt can be a very terrifying issue. When you face thousands of dollars in credit cards debt you do not have enough money to save for retirement or to pay off your mortgage more quickly.

You can save a lot of money and reduce your monthly payments by consolidating your credit cards debt. If you own several credit cards try to consolidate your debt into a single credit card with a lower percentage rate. It will help to reduce interest costs and make your monthly payments more manageable.

One of the best ways to consolidate your debt:

Refinance with a balance transfer credit card
Consolidate it with a personal loan

3). Get cash back when you shop online.

For many of us, it has become so convenient to shop online regularly. That is why we need to turn it to our advantage and learn how to get paid while shopping online. You can sign up for websites like Ebates, Ibotta, Rakuten, and Swagbucks to take advantage of cash-back rewards. All these websites are free to join and easy to use.

If you want to learn how to earn cash back, save money on groceries and travel, I recommend reading the article by Michelle from Making Sense of Cents:

Best Rewards Credit Cards for 2021 – What You Need to Know

4). Negotiate credit card rates.

If you are losing money by paying a lot of interest on your credit cards you should negotiate your current interest rate with your credit card company. It is important to remember that you have some power to negotiate your current interest rate as long as you have been making payments regularly. Call your credit card company and ask for an interest rate reduction.

5). Transfer your credit card balance.

If you cannot reduce your credit card interest rate, try to transfer your credit card balances to 0 percent APR card. Transferring your balances will help you save hundreds of dollars in interest over time.

The Best Zero Percent Interest Credit Cards

6). Move your money into a high-yield savings account.

Most people have their savings stashed in a local bank with a very low-interest rate. The primary reason for that is because it is convenient and close to their homes. Unfortunately, your money will not grow fast over time with low-interest rates.

You can do a lot better by moving your money into a high-yield savings account. Find online banks that are paying interest rates higher than your bank and keep your savings there.

Check out the Best High-Yield Savings Accounts and start earning higher interest right now.

7). Refinance your mortgage

You can save a lot of money by refinancing your mortgage to a lower interest rate. With a lower interest rate, you can get lower monthly payments. And once you reach 20 percent equity you can eliminate PMI – private mortgage insurance.

Refinance rates from Wells Fargo

How to Save Money Shopping:

The next time you are going shopping make sure to apply these money-saving ideas:

8). Stick to your shopping list.

One of the easiest ways to save money is to stick to your shopping list. Do not go shopping if you do not have a shopping list. Creating a list is a great way to make sure you will purchase only what you need. Otherwise, you might go on impulse shopping and spend more money than you have planned.

Stay away from email marketing and do not subscribe to emails from your favorite retail stores. Avoid the chances of spending more money on things you do not need.

9). Stop going to the Mall.

Retail marketing is all around us and it is hard to fight the temptation to shop for new clothes. That is why if you want to save money you should stop going clothes shopping so often. As I said before you should have a plan and shop only for what you need. And stick to your shopping list!

10). Do holiday shopping right after the holidays.

One of the best ways to save money on shopping is to do your holiday shopping after the holidays. After the holidays, the prices go down drastically, sometimes up to 75 percent lower. I often buy party supplies, decorations, wrapping paper, and even gifts a few days after the holiday passes.

11). Clean your closets.

If you have an urge to buy new clothes often, I recommend going through all your closets and see what you might find. Make an inventory of your clothes. Have a yard sale or use craigslist to sell clothes buried in your closet for years.

Another useful trick is to take the clothes from the back of your closet and bring them to the front. After cleaning your closets, you might find your wardrobe looks completely different and you do not need to spend money on clothes right now.

How to Save Money on Food:

Learning how to save money on food and groceries does not have to be complicated.

12). You can save money on food by:

Prepare some meals at home
Cook from scratch
Get a crockpot
Brown bag your lunch
Invite friends over instead of going out
Share meals when eating out

13). You can save more money on groceries if you choose to:

Skip the bottled water and soda
Buy in-season groceries
Plan your meals around your grocery store’s sale
Start a vegetable garden

How to Save Money on Entertainment and Vacations:

If you are planning a road trip or vacation, there are lots of money-saving ideas. Here are a few of my favorite ones:

14). Check out free events in town.

Our town has several wonderful parks, lakes, trails, free tennis courts, and more. Everyone can have fun playing outdoors, hiking on trails, walking around the lakes, or trying any sports activities. And it is all there for free.

Most towns schedule many free events. You can save a lot of money if you want to get free entertainment and free food. What you need to do is just look at your community calendar. Stop by the local town hall or library and ask how to get a list of upcoming community events. I always check out our town’s website to keep in touch with what is going on around us.

15). Pack food for road trips.

If you want to get out of town, take some time to pack meals and snacks for your road trip. Thus, instead of stopping in the middle of the trip and driving around looking for a place to eat, you can just eat on a road. Even better if you can stop at a nice park and have a picnic there. This way you will have fun and save money. Travel service plazas and fast-food chains are conveniently located right off the highways and always expensive, so you better off avoiding them if possible.

16). Use Airbnb when traveling.

For the past decade, Airbnb became hugely popular among travelers as a cheaper alternative to hotels. Vacations are always expensive. The next time you plan on taking a trip, check out to see and compare prices for Airbnb vs hotels. You can save a lot of money by renting an entire house to yourself for a fraction of the hotel cost.

Stay at Airbnb

17). Use Booking.com for travel deals.

Booking.com is one of the best websites in the online booking world.

city of Rome - save money on travel expenses

We like to travel and use this website all the time for booking our hotels because you can find some incredible deals. If we stay at the hotel, we always try to find one with breakfast included in the price. I love hotel breakfast especially when they offer regional specialties. With breakfast included we do not need to start our day trying to find a place to eat and we can take a bagel or pastry and some fruit for our lunch later.

Use Booking.com for last-minute deals

18). Use your AAA discount.

If you are an AAA member you can save a lot of money by using your AAA discounts. AAA travel agency has money-saving offers from cruise vacation packages and hotel discounts to car rental deals. To save more money use your membership card to get a discount anywhere you can.

Use AAA for your travels

How to Save Money at Home and on Services:

There are many ways to save money at home and on services. These tips will help you minimize your household expenses significantly.

19). You can save money at home if you want to:

Try to fix things yourself. You can learn anything you want from YouTube.
Turn off the lights every time you leave the house or the room.
Install energy-efficient light bulbs. Swapping just your 4 or 5 most used light bulbs for LEDs can save you $50 or more a year.
Rent out unused space in your home.
Cut your lawn.
Look for a cheaper place to live.

20) You can save money on services if you choose to:

Get rid of some of your subscription services (meal deliveries, streaming services, etc.)
Cancel unused gym memberships.
Cancel the cable or satellite channels you do not watch. Switch to low-cost cable alternatives such as Netflix, Amazon Prime Video, or Hulu.
Get rid of your home phone and switch to cell phone plans.

Final Words

We all know that trying to find easy ways to save money can be tough. We have been there before. There are times you feel that you are not making much progress even you have tried everything. However, if you are prepared to sacrifice now and learn about the best ways to save money every day you can reach your financial goals a lot faster.

What are your favorite ways to save money? Share your thoughts and ideas with us in the comments below.

Remember to share this post if it helped you!

9 Ways to Organize and Simplify Your Finances

by Maggie 4 Comments

woman's hands - dollar bill - organize-simplify-your-finances

The modern lifestyle can be very chaotic and stressful. It is no wonder we are overwhelmed by our busy schedules, family responsibilities, and finances.

Money management can be complicated on all levels. Everything from budgeting, retirement planning, savings, investing, debt, and even types of insurance needed to be organized and managed.

I do not know about you, but I have found that often enough finances are in control of my life. I get overwhelmed with so many parts needed to be managed to keep my money goals on target.

Fortunately, there are many ways to manage money without getting overwhelmed. Learning how to organize and simplify finances eventually will help you stress less about money and focus on what is important in your life.

If you feel that your financial life is out of control, I encourage you to try one or two ways to organize and simplify your finances.

1. Organize financial paperwork.

It is hard to simplify your finances when you do not know where to find your financial papers at the last minute. And in case something happens to you does your family know where to find your important documents?

That is why the key to keeping your finances simple is to keep them organized in one place.

Collect all your bank statements, bills, legal documents, mail and set up a filing system in a way it suits you. The filing system should be simple and yet effective to keep track of your financial papers. I keep all my papers in simple manila folders and hanging file folders inside a 3-drawer file cabinet. All papers are divided into categories:

Expenses
Credit cards
Banking
Medical
Insurance
Investments
Tax returns
Miscellaneous

Once a year I go through all folders and get rid of everything I do not need anymore.

2. Track all financial accounts in one place.

It is hard to keep a track of everything you own if you do not have a system. If you want to simplify your finances, you should create a list of everything you own. Seeing all your financial information in one place will help you get a big picture.

Start the process by gathering your financial information in one place. This way you will see all your expenses, assets, debts, and liabilities at glance. Whether you want to list them down in a traditional ‘pen and paper style’ or create an Excel spreadsheet, call it “an inventory of your accounts”.

You can also do it with a personal finance app like Mint. This popular free online financial tool allows you to link all your accounts to get a real-time view of your financial life in one place. Also, this app helps you pay bills in one place, gives you updates on your payments, gets reminders on your due dates.

I personally use a combination of Mint and Excel spreadsheet and it works well for us.

MINT

3. Consolidate your accounts.

One of the easiest ways to simplify your finances is to consolidate your accounts. Many people still like to have multiple savings and checking accounts and keep money in several different banks. In addition to that, you may also have a mortgage, retirement and investment accounts, and insurance products. It is a lot to juggle.

I believe it makes your financial life is complicated. If you want to simplify your finances, you should keep your accounts to a minimum.

I even recommend closing your old accounts including your old retirement accounts. If you changed your jobs a few times, you might still have your 401(k) money with previous employers. And if you forget to roll over this money to your IRA or Roth IRA, you may even forget to track thousands of dollars invested in old retirement accounts.

Save yourself the headache of dealing with multiple savings and checking accounts by closing those that are not useful and consolidate them in one bank account. If you have fewer accounts to track, it means you have less hassle remembering logins, websites, and tracking your money.

4. Pay your bills automatically.

If you hate keeping old receipts and bank statements, you should take advantage of automation and go paperless. I personally do not remember the last time I mailed off a check to pay our bills.

table-globus-smartphone-organize your finances

There are many benefits of paying your bills online including convenience and security. By going online, you will not be using envelopes, stamps, and checks as much as it was popular in the past. Moreover, it will be easier to track your payments using a lot of tools like reports and alerts when you sign up with an online service. The best part of automation is to reduce the stress of money management and make it less complicated.

All our family bills are set up to be paid automatically out of our checking account. I just have to make sure I added money to that account before the bills are due. Even though I keep an eye on all our transactions, but I never have to worry about being late on bill payments.

5. Automate your savings.

Another great way to simplify your finances is to automate your savings. Learning how to automate your savings will help you stress less and save more. Every time we receive our paychecks, a lump of it automatically is going into our retirement accounts. Another portion of our income is deposited into our savings account and then the rest is going into our checking account.

We use our savings account for keeping our emergency fund money, and funds for future travels. The checking account is where we keep the money for our monthly bills and living expenses. I like to know that our income gets distributed in a few simple accounts. By automating it, I always know I am going to be saving a certain portion of our income each month.

Another great thing I like about automating our savings is that even a small amount of money will grow up over time. I started with a $50 automatic transfer from checking to savings account once a month, then increased it to twice a month. The automation really helped to raise our travel fund from $1,000 to $8,000.

6. Simplify your investments.

The simplest way to invest your money is through index funds. Index funds are low-cost and low-risk investments because they follow the market indexes. But you still have to deal with asset allocation and portfolio rebalancing.

If you are a new investor who likes hands-off investing experience, try using Robo-advisors.

I recommend checking out Betterment as a Robo-advisor.

Robo-advisors are known as online advisors or automated investing services. Robo-advisors are much cheaper than a human financial advisor. These online services make it easier for you to start working on your financial goals. You will get help with your investments at a low cost and with low account minimums.

If you want to learn more about Robo-advisors, I recommend reading What is Robo-Advisor and How Do They Work from Balance.

7. Pay down debt.

Carrying debt on a few credit cards makes your financial life stressful. When you face thousands of dollars in credit card debt you do not have enough money to save for retirement or to pay off your mortgage more quickly.

Set your financial goal to get rid of high-interest debt as quickly as possible. You can use recommended debt snowball or debt avalanche strategies to pay down your debt.

8. Package all services in one place.

Consolidating your expenses in one or two places is another way to simplify your finances and save some money.

Many companies produce and supply multiple products and services. They sell these products or services separately or in packages or bundles, at a “bundle price”. As a result, you can buy them together as a package at a lower price than what you would pay for them individually.

You can bundle together services like your internet, cable TV, and cell phone. You can also package together with all your insurance needs with one company such as homeowner and car insurance.

The best part is that you can save money by getting a discount from your provider for combining two or more services on one bill. And you can reduce the number of bills to pay each month from several to just one.

9. Reduce the number of your credit cards.

Another way to simplify your finances is to get rid of numerous credit cards.

Once, we used to have nine credit cards and it was way too complicated to keep track of our spending. We used credit cards for promotional money transfers, to earn cash back, and other rewards. At some point, it became a nightmare to pay off those balances.

Eventually, we trimmed down the number of our credit cards to just a few. We prefer to use credit cards with no annual fee and cashback rewards. And we do not worry about high interest rates because we always pay the balance off in full each month.

Best Credit Cards Comparison by Forbes

Final Words

If you want to simplify your finances, it does not have to be complicated. Just making small changes as I have described in this post can make a huge difference in your relationship with money.

Do you feel frustrated dealing with your finances? How do you simplify your finances?

Remember to share this post if it helped you!

Planning for Retirement in Your 50s

by Maggie 4 Comments

Woman-car-retirement planning in your 50s

We have heard so many times that the sooner you start saving for retirement the better off you will be in your old age. But when you are in your 20s and 30s you are not in a rush to save for retirement. It is easy to fall into a trap thinking you have plenty of time to do that later. Suddenly, you are in your 50s and have not saved enough for your golden years.

Life has presented you with some challenges. You were busy with kids, saving for their education, straightening out debts, and trying to pay off a home mortgage. In the end, there was never that much money left. But do not despair, because it is not too late. If you are in your 50’s and fell behind on your retirement goals, there are things you can do to boost your retirement savings.

Use these smart steps to find out how to catch up on planning for retirement in your 50s.

1. Retirement projection

Start with figuring out how much money you will need to retire. First, find out how much income you will need to cover your retirement expenses.

Financial experts suggest that you need about 80 percent of your pre-retirement income to maintain the same standard of living in retirement.

Suppose my current annual income is $70,000. Multiply that number by 80 percent ($70,000 X 0.8 = $56,000). So, I will need around $56,000 in retirement to live the way I do today. And if I have expensive hobbies like traveling, I will need a higher number.

Next, figure out how much income you will receive from Social Security. You can contact the Social Security Administration to find out how much will be your benefits at age 62, full retirement age, and at 70. For today, I use the estimated average Social Security retirement benefit in 2021 which is $1,543 a month or $18,516 a year.

Then, subtract your Social Security income from your projected retirement income and you will see how much you need to provide from your savings. $56,000 – $18,516 = $37,484 a year.

So, in our simple case, I will need $37,484 in annual income to cover the income gap. The money to cover that gap should come from 401(k), IRA, Roth IRA, and other retirement savings.

5 Easy Steps to Calculate Retirement Income Gap

Also, you can use an online retirement calculator for retirement projection. Take a few minutes to enter your personal information, see the numbers, and where you stand today.

AARP Online Retirement Calculator

But I think the best way to find out how much money you need to retire is to create a retirement budget based on your current and future expenses. You might have a general idea of what you spend now. But you will be better prepared if you have a clear picture of your expenses today and how that might change in the future.

If you do not know how to create a retirement budget or organize your finances for retirement, I recommend reading my posts:

2. Minimize your debt.

When you are in your 50s make it a goal to pay off your credit card debt, student loans, car loans, and any personal loans before your retirement date. Do everything you can to retire debt-free and even pay off your mortgage if possible.

When you stop working and start living on a fixed income you will need to stretch those retirement dollars as far as you can. How can you enjoy your retirement if you must spend a portion of your retirement income to make a mortgage or debt payments each month?

Credit cards

If you are carrying a high-rate credit card debt you are putting a lot of pressure on your finances. Those high-interest payments can eat away your ability to save. I recommend working on a debt payoff plan if you have more than one credit card.

There are two most popular debt payment strategies – the snowball method and the avalanche method.

The snowball strategy works by paying off the credit card with the smallest balance and then working your way up until all credit card debt is settled.

The avalanche strategy allows you to pay off your highest interest rate debt first and then work it down. I recommend focusing on your highest-interest debt first because the longer it takes you to pay it off, the more money you will pay towards interest.

And if you can help it, do not add any more debt to the pile while paying off old debt.

How to Pay off Debt Before Retirement

Mortgage

If you still making mortgage payments now it is time to figure out how to pay it off in full before you retire. You do not want to carry that financial burden while living on a fixed income. Look at your mortgage balance and try to figure out how much extra you can put toward your mortgage each month. Those extra payments can reduce your principal balance significantly.

Also, instead of sticking with the traditional monthly payments, you can start making bi-weekly mortgage payments. The whole idea of paying off your home loan earlier will help you eliminate debt faster and start saving more for retirement. In addition to that look into refinancing your mortgage to get a lower rate and to reduce your monthly payments.

When you plan for retirement in your 50s, getting out of debt should be your first priority. At this age, you have to make the most of your working years and build or increase your nest egg within the next 10 to 15 years.

3. Maximize your retirement savings.

Being in your 50s is an ideal time to look at your retirement plans and financial goals. You are close enough to retirement to have a realistic idea of how you want to spend your golden years. Yet you are far away to tweak your financial goals.

charts-laptop-plan for retirement in your 50s

The closer you are to retirement, the less time you have for compound interest to kick in and start working its magic. That is why the ultimate goal in your 50s is to stash as much money as possible in your retirement savings.

Whenever possible, increase your retirement contributions up to the maximum allowed in retirement plans such as 401(k), IRA, and Roth IRA. The best advice is to start spending less so you can put more money into your retirement savings.

The 2021 contribution limits are:

$19,500 for 401(k) retirement plans. And if you are age 50 or older, the catch-up contribution is an additional $6,500. So, you can save a total of $26,000.
$6,000 combined contribution for traditional IRA and Roth IRA. And the catch-up contribution for people age 50 or older is $1,000. So, you can save up to $7,000 with your pre-tax money (IRA) and after-tax money (Roth IRA).

When you are getting closer to retirement, maximizing your traditional 401(k) and IRA accounts is important but not always enough. While you are still working you can make it a priority to save even more money in your Roth IRA account, emergency fund, and may be taxable investment funds if possible.

A Guide to Understanding a 401(k) Plan

Another way to increase your retirement savings is to work longer. The goal is to make the most of your working years. You need to maximize the time you have left. Earning an income for a few more years could improve your financial security in retirement.

4. Spend less and save more for retirement.

I am sure you may not like to hear this, but the fastest way to save more money for retirement is to cut your expenses. If you start practicing how to curb your spending and live on less money today, it will make your life easier in retirement.

Many people in their 50s enjoy the peak of their salaries. The kids are gone, parents become an empty nesters and start spending more on luxuries. It is easy to get used to a luxurious lifestyle. However, it will be tricky to save money and even to retire if you let your spending get out of control. After all, the less you spend the more you save.

15 Ways to Live on Less in Retirement

5. Think about where to live in retirement.

When you are only 10 to 15 years from retirement, you need to think about where you will live because it will affect your living expenses.

houses on lake and mountains -where to live in retirement

Housing is expensive. We all know that it takes a big chunk of our income to pay for property taxes, homeowner insurance, utilities, maintenance, and mortgage. Even with no mortgage payments, housing will be your biggest expense in retirement and it may eat up a big chunk of your retirement income.

I am sure you live in a lovely home. And I know that you love your home and have a lot of great memories of raising your family there. But if it is in a high cost of living neighborhood and expensive to maintain, you need to downsize and move to a place where you can afford it. Otherwise, you will run out of money fast.

There are a couple of housing options to consider before you retire:

Sell your big house in an expensive location and move to a smaller house or condo in a low-tax state. In this case, your living expenses will be reduced, and you might have some extra income to pay for things you love to do in retirement.
Stay in your town but move to a smaller home or condo. Having a smaller place to maintain will cost you less money.
Sell your house and rent an apartment in a big city. But if you want to live closer to the museums, art galleries, concerts, and festivals you should be financially prepared to spend more money because retiring in a booming metropolis can be pricey.

If you want to learn more about housing options, relocating, and downsizing I recommend reading my posts:

6. Protect yourself and those you love.

Planning for retirement in your 50s when retirement is on the horizon, make sure you have insurance plans in place to protect yourself and your family. Have you thought about how to protect yourself as you age and how to help your family care for you if you need it? When the time comes that you need assistance who will manage your finances, your medical care, and your regular day-to-day life?

young and old women in a park-healthcare in retirement

I understand that these are difficult topics to discuss. But it is a part of reality to grow old. And if you love your family you will plan for it. So your loved ones will not struggle and may have to scramble to care for you.

I write often in my articles about the cost of medical expenses in retirement. I want to remind my readers that healthcare is the second biggest expense in retirement after housing and you need to plan for it. Medicare is not free. It does not cover all your medical expenses and does not pay for long-term care.

Long-term care insurance is the most recommended way of planning for future expenses. It will cover nursing homes, assisted living facilities, and in-home care. It will help you not to be a financial burden on your family if that time comes. And you do not want to leave your husband or wife with nothing because the entire nest egg was used up taking care of you.

Putting It All Together

You are in your 50s and feeling the urgency of doing everything you can to have financial security in retirement. If you are behind on your savings and might be feeling the pressure, I want to remind you that it is never too late to start planning and saving for retirement.

The longer you put off dealing with your financial situation, the farther away you will be from your retirement dreams. So, do not delay planning for your next phase of life and take the first step today!

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How to Pay off Debt Before You Retire

by Maggie Leave a Comment

the chalkboard with words: money - yes or no

One of the greatest threats to baby boomers today is not that they don’t save enough, but they owe too much. According to the statistics, many baby boomers are carrying a significant amount of debt into retirement. Recently I read that as many as 61.3% of household’s adults older than 60 have the median total debt around $40,900.

Paying off debt can be a long journey and it depends on how much you have accumulated it over the years. When you retire and start living on the fixed income it will be hard to balance the fun of retirement and worries about finances – and debt is a big reason why.

Primary sources of debt

There are several primary sources of debt we have the tendency to collect during life:

mortgage debt
credit card debt
student loan debt (if you have kids)

Then there is other debt like car loans, home renovation loans, medical expenses, etc.

For most people, the largest liability is their home mortgage.

In fact, nearly 33 percent of total household spending goes toward this one big-ticket item.

On top of the mortgage debt, there is a credit card debt. Many baby boomers carry the highest amount of credit card debt than previous generations. On average people between age, 55 to 64 owe more than $10,000 in credit card debt. And if you have kids you will be already paying for their education.

If you want to enjoy a debt-free retirement, you need to pay off, reduce or get rid of as much of your debt as possible.

Simple ways to pay off debt before retirement:

1. Start with analyzing your personal problems

Do you have bad spending habits? Are you an impulsive shopper?

If the answer is yes, you need to make a plan for how to improve and control it:

There is a line between the necessities and luxuries. Too often we forget about it. It can be useful to break out your spending into needs and wants.

Your needs are the necessary living expenses like housing, groceries, utilities, transportation, health care.

Your wants are things like nice-to-haves, but not required for everyday survival. Things like travel, hobbies, expensive cars and clothes.

Popular 50/30/20 rule of thumb to follow:

According to this rule, you should budget 50 percent of your household income towards needs, 30 percent toward wants and 20 percent on savings. Paying off the debt should be included in 20 percent.

If you’re serious about reducing your debt, you need mentally say goodbye to some luxuries in your life:

dining out every weekend
visits to the spa and manicure/ pedicure salons
new clothes, shoes, and bags for every season
luxury vacation.

If you don’t control how much you spend, eventually you’ll add more new credit card debt to the old one.

2. Create a plan of paying off your debt

Creating a plan of how to pay off the debt is as important as sticking to that plan. After all, if you come up with the plan, put it on the paper or your excel spreadsheet, but never follow it through, you’ll be disappointed before you see any results.

If you have various debt, you need to decide which one to pay off first and which one is the last one.

There are two simple strategies to pay off the debt:

graphical image of a person at the intersection trying to find the right way

The snowball strategy is popular among Dave Ramsey followers.

If you want to use this strategy, start by paying off the debt with the smallest balance, while continuing to make minimum payments on the larger balance debt. The plan is to pay off the first debt as fast as possible by adding all extra money to the principal.

When you finish paying off the first debt, move to the next one. Once the first debt is crossed off the list, use all extra money to pay off the second debt and then go on until all debt is paid off in full.

There is a psychological effect behind the crossing each debt of the list, which helps to motivate you and create momentum.

The debt avalanche strategy.

If you want to use this strategy, start by paying off the debt with the highest interest rate, while continuing to make minimum payments on the lower interest rate debt. Once the debt is paid off, apply all extra money towards the next-highest interest rate debt.

You should choose whichever method makes more sense to you.

If getting a small victory is more appealing to your personality, then go with the snowball method. But it’s good to remember that credit card debt typically comes with a high-interest rate. The longer it takes you to pay it off, the more you will pay in interest.

Unlike mortgage and student loan interest, you can’t deduct credit card interest on your tax return.

My husband Roman and I created a plan before we seriously started paying off our debt.

The deck avalanche strategy works better for us. It helps to save the most money in interest payments. However, depending on the size of the debt, it might take longer to pay off the balance and finally cross the debt off the list.

Currently, we are paying off our daughter’s student loans.

We have three different loans with interest rates of 6.49% the highest, then 6.35% and the last one is 6.01%. We started paying off the highest interest rate loan of 6.49% and were very happy to cross it off the list. After that, we moved all extra money towards the next-highest of 6.35%.

We are planning to pay off the rest of student loans by the end of 2019. (Note: I am happy to report that we finally paid off all student loans. The last check was sent on December 15th, 2019.)

Should you pay off your mortgage?

For many of us, the mortgage debt is the largest in our budgets.

It is my dream to pay off the mortgage before we retire. But I don’t think it is possible. And I am not alone. To be mortgage -free is a dream for many people who are close to retirement.

Roman and I refinanced our house many times. But even with a low- interest rate of 3.5 percent, the mortgage payments take the biggest chunk of our budget.

If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:

Downsizing. Your home is one of the biggest investments. If you’ve been living there for a long time, it went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.

You can sell the big house and trade down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.

Invest equity. Maybe you don’t want to have a hassle of home ownership in retirement. You want to travel or visit your family and friends. The other option will be to sell the house, invest the cash, and enjoy living on rent and mortgage-free. Investing the cash from the home sale will bring additional income in retirement. Let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.

Don’t create new debt, while paying off old ones

a woman with shopping bags at the shopping mall

You have created a strong plan to pay off the debt in the next 12 months. Suddenly your car broke down and or your house furnace blow in the middle of the winter. Emergencies like that could come with the hefty bill.

If you don’t have extra cash available you might be forced to take a new loan or put it on the credit card.

By adding new debt to the old ones, you might feel emotionally defeated and stop trying to pay off all debt.

But if you have saved some money in the emergency fund, it will help you to avoid taking more debt. The best practice is to have saved from 3 to 6 months of monthly expenses in a separate saving account, so you can have access to your emergency money any time you need them.

To save for retirement or pay off a debt?

It’s hard to save for retirement when you’re trying to pay off the debt. There are so many financial decisions to make and it feels like you don’t go ahead on anything.

Please don’t try to reduce your debt by cashing out 401(k) or other retirement accounts. It seems like an easy step to take money out of your retirement savings and reduce your debt. But you’ll regret it later. Retirement savings are for retirement.

If you are under 59 ½, you’ll be charged 10% penalty fee for early withdrawals from 401(k) and traditional IRA accounts. In addition to that, you could be pushed into a higher tax bracket, if you take money from your retirement accounts.

If you are older than 59 ½ and allowed to take money without being penalized, you might be still paying the price of being in a higher tax bracket.

My advice is to continue saving for retirement and create a plan to pay off the debt.

It might take longer, but in the end, you’ll be proud of yourself that you stick to the plan. Your retirement savings will be growing, and your debt will be reduced with every month. In the end it will be a win-win situation.

Discuss the plan with your partner

It’s always a good idea to discuss your plans with the spouse or partner. After all, it will be a team effort to create a plan and to stick to it.

Final thoughts

For many of us living in retirement with debt might be a constant source of stress and anxiety. If we don’t plan for reducing it now, we will be facing the challenge of not having enough money to pay for our expenses in retirement.

Paying off the debt on a fixed retirement income can be a big burden. It will be very difficult to get ahead or live comfortably if you have to pay large debt balances.

The best approach to deal with debt is to start with small steps. The earlier you develop a plan to reduce it, the easier it will be to tackle.

In the end, you’ll have a better chance to afford the retirement you’ve always dreamed of.

Please share the ways you deal with your debt. Do you have a plan to reduce it?