Small change adds up: reduce your debt and build savings

The recession has forced many of us to change how we spend money and manage our budgets. If you’ve never started a savings account or are feeling the burn of paying off high credit card balances each month, it can seem impossible to simultaneously pay those bills and put away something for a rainy day.

Now more than ever, it’s crucial to do both, because the job market is fickle and expenses are increasing for things like basic things like groceries and utilities.  The hard reality is that many people are only a paycheck or two away from potential homelessness, should a drastic financial emergency or job loss occur.

I am no financial planner, but will share some of the steps I took to reduce my debt and increase savings.  I racked up over $20,000 of debt stemming from my divorce over seven years ago, and I didn’t get serious about addressing it until two or so years ago. At the time, I was a manager at a global professional services firm with a comfortable salary.  While I was able to stay afloat, I felt as if I would never be done making payments for expenses incurred years before. 

After giving birth to my daughter, I realized I needed to ensure her stability – now and for the future.  It was a good thing I did, because I was laid off two months ago.  Although I am rightly concerned about my financial stability, I am not panicking the way I would have several years ago if this job loss had occurred.

Money has always been a topic that caused great personal discomfort.  Historically, I have been terrible with my finances.  As soon as cash came my way, I would spend it and didn’t always make wise choices with regard to housing and other investments.  It took me a long time to create a different mindset about how I manage my finances.  Now that I'm a life coach I have found myself occasionally advising others on how to create more financial solvency and stability.  What I provide in my coaching sessions are simple steps based on what I learned and implemented.  This is not meant to be an exhaustive list, but simply some ideas that worked for me that you can try for yourself.  These changes do require some discipline, but as with any habit, if you stick with it long enough, they will become second nature.

Reducing or eliminating your credit card debt

Some simple suggestions for getting out of the plastic money pit:

• Take the credit cards out of your wallet and put them away.  Alternatively, cut them all up except one that you put aside for an emergency. 
• Close several accounts, specifically department or big box store cards, and pay off those balances as soon as possible.  The interest rates alone will keep you chained to them longer than the XBox or couch you purchased.
• Pay for everything – and I mean everything – with a debit card or cash.  Credit cards don't feel like real money - until you're saddled with paying bills each month.
• Pay more than the minimum on your credit cards.  I made payments online and would schedule them twice a month, each time I got paid.  That enabled me to pay more than the minimum because I wasn’t feeling the pinch of a huge sum coming out of a single paycheck, which is often what gets people in trouble.    Example: if a minimum payment was $50, I would schedule two payments of $30 each.  It doesn’t seem like much of a difference, but it adds up over time.
• Put effort towards paying off the smaller debts first. Psychologically, it will give you a boost to see that you’ve knocked back some of the beast, and you can then take the amount you were using to pay those smaller debts against the larger debts.  Example:  let’s say your smaller payment was for $40 and your larger payment is for $60.  Once you’ve eliminated the smaller payment, you should then be paying $100 a month towards the larger debt.  
• If you receive a tax refund, take 1/3 to pay off some your debt.  The last time I received a refund, I was able to completely finish paying off one credit card and reduce another by half.  (By then, my balances were fairly low since I had been plugging away at it for a while, but I still felt like I had accomplished something.)  

Saving for a rainy day

It can seem difficult to put anything away into savings, especially if you’re living from one paycheck to another.  Financial planners recommend at least 6 months’ worth of our salary in savings in case of unexpected job loss.  That’s a daunting goal for most people, so I recommend taking smaller steps to create savings that will build on itself over time.  

Some ways you can pad the piggy bank:

• Open a savings account that is not linked to your checking, or is with another banking institution.  This will limit the temptation to withdraw money.  We all intend to "pay back" our savings, but that rarely happens.
• If your employer allows for flexible direct deposit options, arrange to have a set amount deposited into the savings account each time you get paid.  If that option isn’t available, some banking institutions will allow you to schedule automatic transfers from one account – or even into another banking institution’s account – into another.
• Commit to putting a fixed amount in each time you get paid, even if it’s only $5-10.  It’s more about establishing good savings habits, rather than feeling pressure to create a big balance.  As you decrease your debt ratio, you can begin increasing the amount you add to savings.
• If you receive a tax refund, take 1/3 and put it into your savings.  That little extra chunk of cash will give you a feeling of accomplishment.  (The remaining 1/3 that you didn’t apply to your debts or savings can go towards something fun.)
• Reduce the number of days you go out to lunch or purchase coffee on the way to work.  Aim for at least 1-2 days per week in the beginning.  The days where you bring your lunch or make coffee from home, estimate how much you would have spent and put that cash aside.  At the end of the week, deposit that money into your savings.  It may be hard to visualize at first, so if you have a calendar, put a smiley face or star sticker for each day you set aside lunch money for savings and see how many you can rack up by the end of the month.  
• Save your loose change and convert it to dollars.  You’d be amazed at how much the change you accumulate from cash transactions (which you will have more of if you get in the habit of decreasing your dependence on credit and debit cards) can add up.  Buy a cute piggy bank or a large container to dump the spare change you receive each day, and once it fills up, go to your local bank or grocery store and use one of those machines that count the money and provide you with a voucher for cash, which can then be deposited into your savings.  (The grocery store machines may take a small percentage, which may be worth it if you aren’t industrious enough to roll coins on your own!)  

One other point about purchased food and drink: they are insidious money-suckers, especially if debit cards are used for payment.  It’s common for people to spend $100 or more each month and think nothing of it.  However, if you can reduce that amount by half, you can take the other half and apply it to your savings or your credit card debt.  

If making all of these changes at once seems overwhelming, pick a couple you can immediately start doing and build from there, which is the approach I took.  We can unintentionally sabotage our own efforts by setting our actions and goals too high, then giving up in frustration because we couldn’t meet them very easily. Or, we set such severe restrictions for ourselves that the discomfort makes us less inclined to stick with our goals. Small changes really do add up over time, and gives you more control over how effectively you can implement beneficial and empowering financial transformation.

Do you have other suggestions that worked for you? If so, share them here!
 

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