How to save money and still pay off debt

With everything life can throw your way—medical bills, car repairs, job loss and more—there’s often no shortage of financial emergencies to deal with. So it may make sense to have an emergency fund to help tackle unexpected expenses.

But putting aside a few months’ pay isn’t easy—especially if you’re also working to pay back loans and credit card debt. Although everyone’s financial situation is different, many people wonder: Is it better to save money or pay off debt? Read on for ways to help you do both at the same time.

Key takeaways 

• Saving money while paying down debt is possible.
• Knowing what you owe and being aware of fees and interest could help you prioritize and pay off debt faster.
• Creating a budget, like the 50/30/20 approach, can help you stay on track.
• Finding creative ways to save on expenses—like groceries, rent and subscriptions—can help you free up some cash to save.

You may be saving for an emergency fund, working to reach a savings goal or trying to pay off debt. If so, you might feel like you already have a financial road map in place. 

But it’s still important to examine your savings goals and be really clear about them—that’s according to Carmen Sullo, a Capital One Money & Life Mentor.

Carmen spends most of her workdays at Capital One Cafés, helping people understand their relationship with money. Her philosophy on saving: If you can get your savings to a place where you feel safe and secure, it’s easier to focus on living life to the fullest. 

While you’re saving, you may also want to think about debt—specifically, how much it could cost you in the long run with interest rates, penalties and other types of charges. 

Take credit cards, for example. Making more than your minimum payment is one way to stay on top of your debt. It can also help keep your account in good standing and help you avoid a decrease in your credit scores.

Making more than your minimum payment can also reduce the amount of interest you pay. But even if you can’t pay your full statement balance, paying the minimum amount required can help you avoid penalties or additional fees.

It’s important to know exactly what you owe. Part of that is making sure you can cover your recurring bills before taking on extra expenses. Recurring bills include things like rent, utility bills and various forms of debt.  

After all, when you miss payments, you can be hit with banking charges and late fees—and those can add up over time. Missing payments may also have a negative impact on your credit scores.

Plus, if you’re being charged fees, that’s money that could be better used to pay down your debt or boost your emergency fund.

Building a budget can seem daunting, but it doesn’t have to be. There are simple steps you can take to formulate a basic budget:

1. Add up your monthly income. This includes your salary from your job—plus other sources of income like bonuses, tax refunds or income from side work.
2. Add up your monthly expenses. These can include expenses in the major “buckets”—housing, food and transportation. For expenses that aren’t always the same—food and utilities, for example—you can use an average from previous months.
3. Subtract your expenses from your income. This amount will be the starting place for your budget. Anything that’s left over is what you have to work with when you’re paying down debt and building up savings.

As the Consumer Financial Protection Bureau explains about budgeting, “Maybe your income is more than your expenses. You have money left to save or spend. Maybe your expenses are more than your income. Look at your budget to find expenses to cut.”

Hint: Don’t assume you’ll have the same amount left over each month. If you’re planning a vacation or the holidays are coming up, for example, there could be additional expenses.

It can be helpful to have a budgeting model to follow. One popular model is the 50/30/20 approach, first popularized by Sen. Elizabeth Warren. Simply put, you divvy up your after-tax income into three categories: 50% for needs, 30% for wants and 20% for savings or paying off debt. 

Rent, utilities, groceries and minimum credit card payments fall under “needs.” And “wants” include things like subscriptions, eating out and other nonessentials. 

The 50/30/20 rule can also be a useful tool for getting your budget to where you want it to be. If you’re spending more than 30% of your income on “wants” each month, take stock to see where you can cut back. 

If you’re able, you might consider building a buffer in your checking account. Rather than spending or moving all your extra money to your savings account, let some of it sit untouched in checking. Then forget all about it. Resist the temptation to spend it by pretending it’s not even there.  

Consider it a “just in case” fund. Leaving a little extra money in the account might help you avoid overdrawing. 

Some banks, like Capital One, have eliminated overdraft fees. If your bank is different, those extra charges can really add up. 

A buffer can give you peace of mind. And with one in place, you can focus on making real progress toward your debt or savings goals.

Once you have a buffer in your checking account—and feel like your debt is more manageable—you might consider using any extra money to build savings.

As you build savings and eliminate debt, keep track of your progress. That could help create momentum when it comes to making good choices, like saving more or spending less. 

Here are some basics for starting and growing your savings:

• Shop around for your savings account. Many savings accounts offer a small amount of interest as a return on your deposit. But interest rates can vary from one account to another. If you find an account with better rates, that extra interest can add up over time—especially as your savings grow.
• Put any extra income into your savings. Extra income can be things like cash gifts, tax refunds, work bonuses or money from a side job. The extra money can really boost your progress.
• Make saving automatic. Saying goodbye to your spending money can be the hardest part of building your savings. An automatic savings plan can help take the sting out of it by making a transfer to your savings account before you ever see the money in your checking account.
• Avoid the temptation to splurge. You may want to resist the appeal of things you want—and instead spend on things you need. That way, you can put even more toward your savings.

There are two steps you can take if you need to start adding to your savings fast:

• Save money on groceries. Lowering your grocery bill is one way to quickly increase your savings, and it might be easier than you think. Buying produce and raw ingredients rather than prepackaged meals might be cheaper. Most grocery stores also offer free rewards cards or loyalty programs that give you access to deals and discounts.
• Cancel those unused subscriptions. It can be all too easy to accumulate more monthly subscriptions than you regularly use. While it may seem like a small one-time cost, it can quickly add up month after month. Take an honest look at your subscriptions. If you haven’t used one in a month or more, cut it out! That’s more money to throw at savings each month. You can always re-up when the new season of your favorite show drops, then cancel again when you’re done bingeing. If you need help managing recurring payments and free trials, see how Eno, your Capital One assistant, can help.

Trying to cut back on splurging? Consider following the 30-day rule. If you find something you want, wait 30 days before buying it. Then, if you still want it and it fits into your budget, maybe it’s time to buy it. But if you’ve changed your mind, that’s money saved. 

Ready to pay down debt and grow your savings at the same time?

Start by taking a look at your goals. Knowing where you want to be financially will make it easier to chart a course that takes you there. 

From there, take stock of your monthly expenses, put together a budget and reflect regularly on your progress. Watching your savings grow in real time can help keep you focused and feeling positive.

Looking for more support on your savings journey? Consider making an appointment with a Money & Life Mentor. Mentors might be able to help you align your financial habits with your life goals.