What's keeping you from achieving financial freedom? Whether you're finishing up student loan payments from your college days or caught in a cycle of credit card debt, outstanding debts are likely preventing you from having more freedom with your money—specifically when it comes to saving. When you're carrying significant debt, it's easy to prioritize debt payments over saving, but this approach can damage your long-term financial health. This guide will walk you through the steps to effectively balance debt repayment while ensuring you're saving adequately for the future.
As you reassess your debt repayment strategy, it's crucial to identify which debts are costing you the most by examining their annual percentage rates (APR). APR represents the total yearly cost of borrowing money, including interest and fees. Depending on your loans and lenders, these rates can vary significantly. Here are examples of high-cost debt types:
1. Payday Loans – 400% average APR
2. Credit Cards – 22% average APR
3. Personal Loans – As low as 10% APR
High-interest debt is generally defined as any debt with an APR of 8% or higher, so you should avoid these whenever possible when making financial decisions. Regardless of whether your loan carries a high or low interest rate, it's important to understand exactly how much you're spending on interest versus principal. Taking a hard look at how much you're spending just to service debt compared to what you're putting toward savings can be eye-opening—especially when you realize how much you could be saving for other financial goals.
When you consider the burden debt places on your finances, you might feel urgency to pay it off as quickly as possible. This is an encouraging mindset because eliminating debt will significantly improve your financial wellness by freeing up money currently tied up in monthly payments. With this motivation, evaluate how much you're currently contributing to each loan monthly and determine if you can pay more than the minimum amount.
For example, you might be paying $200 on your student loan each month, but this could be only the minimum payment. Can you cut unnecessary expenses in your budget to increase your loan payments? Even small additional contributions can make a significant difference over time—like skipping daily coffee shop visits or cooking more meals at home instead of dining out.
Recognizing which debts positively or negatively impact your financial future helps you prioritize which ones to pay off first. You can categorize these into good debt and bad debt.
To be clear, "good debt" doesn't mean you should accumulate debt constantly. The goal is always to pay off all debt eventually. However, some large expenses require loans—like a mortgage for your home or an auto loan for your car—so you want to handle these strategically to enhance your financial situation. Here are debts that can benefit your financial journey:
Bad debt typically carries high interest rates and is often used for purchases that don't build long-term value:
In addition to these, taking out a personal loan for a family vacation or to buy a new laptop may not be the best option for your financial health. Notice the key difference: good debt tends to be for long-term investments (like education to become a doctor), while bad debt funds short-term purchases focused on instant gratification. Consider your long-term goals when deciding whether to take on debt or prioritize paying it off quickly.
After analyzing your debts and identifying which ones to pay off quickly, you might find that saving money has taken a backseat. While paying off debts quickly is beneficial, it can be dangerous if you don't have a strong financial foundation built on savings. Emergency savings are essential for your financial health, and balancing saving with debt repayment can be challenging since both are high priorities.
The key to managing both successfully is not viewing them as competing goals. Instead, see them as complementary components of your journey toward financial freedom. Having some emergency savings can actually prevent you from taking on additional debt when unexpected expenses arise.
Managing multiple debts and savings goals can be overwhelming without proper resources. One of the most damaging consequences of not monitoring your financial health is poor money management. While you don't need to obsess over your finances daily, schedule regular check-ins once or twice monthly to ensure you're making debt payments on time and in full. If you're working toward specific savings goals, consider weekly check-ins to better manage your spending.
Various financial apps can help you manage your money with confidence:
Honeydue is excellent for couples managing finances together. This app allows you to combine accounts, view each other's transactions, track your budget, and set bill payment reminders.
If you're looking for comprehensive financial wellness management, try the Leaders Credit Union mobile app. It features money management tools to view transactions, track monthly spending, monitor your credit score, and forecast debt payoff timelines.
For strong debt payoff planning, PocketGuard helps create strategies by analyzing your minimum payments, interest rates, and desired payoff timeline to keep you on track toward becoming debt-free.
Zero-based budgeting ensures you stay on track with financial goals. EveryDollar uses this strategy to help you monitor bill payments, loan progress, and savings.
Have your debts been preventing you from building savings? Our Financial Champions can help you learn strategies to avoid falling deeper into debt, finally giving you the financial freedom to achieve your money goals. To begin your journey, check out our free beginner's guide to establishing savings.
Leaders is federally insured by the NCUA.