Spend Less, Save More, and Get Out of Debt in the New Year
Maybe you overdid it with the holiday spending. Between buying presents and traveling to see loved ones, it’s easy to lose track of exactly how much you’re spending. But when you get your January statements and see all your purchases in black and white… ouch. Seeing a lower balance than you’d like in your checking account and a higher credit card bill than you expected can be just the wake-up call you need to take control of your spending.
If one of your New Year’s resolutions is to get out of debt and improve your finances, these tips can help.
Cool It With Your Credit Card
Wondering how to pay off debt in the new year? First things first: You need to avoid going further into debt. While you’re in debt repayment mode, some people find it helpful to temporarily stop using their credit cards. Switch to paying with cash or use your debit card instead.
Some people who’ve needed extra help avoiding the temptation to overspend have even resorted to freezing their credit – literally – by putting their credit card in a cup of water and storing it in the freezer. That way, even if you wanted to use your card, you’d have to wait for it to thaw out first!
If you carry a balance on one or more credit cards with a high interest rate, consider consolidating your debt with a personal loan. Personal loans typically have a lower interest rate than credit cards, so you can use the money you’re saving on interest to help pay down your debt faster.
Reexamine Your Budget
Review your budget carefully and make a list of all your monthly bills and due dates. If you’re able to, make more than the minimum payment each month. And, most importantly, make sure you pay all of your bills ON TIME. Making a late payment not only means you’ll get charged a late fee, but it can also negatively impact your credit score.
If you don’t have a budget yet, it’s easy to create one with our free online tools in My Money Manager, right in the American Heritage Online Teller and mobile app.
A common budget is the 50/30/20 plan. Your essential expenses, such as housing, utilities, and food, should make up 50% of your budget. Then, use 30% of your income for wants and 20% for savings and debt repayment. If you want to speed up your journey to being debt-free, try switching it to only 20% for discretionary spending and 30% for debt obligations.
Ways to Cut Back
The more money you can allocate toward debt repayment, the faster you’ll reach your goal of being debt-free. Take a closer look at your monthly expenses and identify areas where you can cut excess spending.
If you’re paying for subscription services but not using them, cancel them and redirect those funds towards paying off debt. If you see that restaurants and food delivery charges are eating up a lot of your money, take a break from eating out for a while. Meal prepping and cooking at home are not only great ways to save money, but they’re also often healthier too.
Spend Less, Earn More
In addition to trimming unnecessary expenses from your budget, get creative with ways to make some extra cash. If a second job or side hustle isn’t really feasible for your schedule right now, try selling some of your stuff online. One person’s trash is another’s treasure, right? You’ll have the added benefit of a less cluttered house too!
If you’re in the process of paying off credit card balances, any “extra” money that you get during your debt repayment process should go toward that goal. Since you didn’t have that extra money before, this step won’t reduce your standard of living, but it will help lower your debt faster.
Looking forward to a tax refund this year? Instead of splurging on something you don’t need, put that money toward debt repayment or your savings.
Increase Your Savings Little by Little
The 52-week savings challenge is a great way to get started. Just save one dollar the first week, two dollars the second week, three dollars the third week, and so on for the rest of the year. By week 52, you’ll have almost $1,400 saved up!
Avoid These Common Pitfalls
Your getting-out-of-debt journey might take a while, and it’s easy to get discouraged along the way. Spending your entire paycheck on bills and debt repayment can get old fast. In order to stay motivated, make sure you include some “fun” money in your budget too.
It doesn’t have to be a lot, but knowing you have something to look forward to will make it easier to stay disciplined. And rewarding yourself with small treats along the way makes it less likely that you’ll cave into temptation and start overspending again.