Save Your Way Out of Debt
There is no secret to paying off debt. If it is an installment loan, just make the payments on time and at the end of the term of the loan, the debt is retired. If it is revolving debt (credit card debt), quit charging on the account, pay more than the interest charged each month, pay on time, and eventually the debt will be paid off. That’s it.
If paying off debt is so simple, why do some folks struggle so much with it? They struggle because debt is just a symptom of the problem. The real problem is a lack of savings. There is not enough money to handle expenses or purchases that exceed monthly cash flow. Solve the savings problem and debt will take care of itself.
Paying off debt doesn’t solve the savings problem. There is still not enough money to handle expenses or purchases that exceed monthly cash flow. Consequently, credit will have to be accessed to pay for those expenses and purchases when they arise, just as it was when the initial debts were acquired.
In order to solve the savings problem, less must be spent than is earned each month and the difference deposited into a savings account of some kind. This means cutting back on some expenditures. A budget is a good way to achieve reductions in spending. In fact, the best way to assure regular savings is to treat savings as an expense and pay it first. As debts are paid off, the money that had been used to make payments can now be added to savings.
As savings accumulate, the need to access credit will eventually be eliminated. Experts suggest that short term savings equivalent to three to six month’s of living expense is sufficient to insulate a person from new debt. At this point, some of the money that had been devoted to savings can be directed to accelerate debt repayment, but saving should continue.
When there is enough savings in place to preclude the need for new debt, existing debt will eventually be retired. The symptom will disappear once the problem has been solved.
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