Taking steps to begin paying off debt is a great way to jump-start your journey towards financial health. But while you’re completing your debt payoff, you should also start thinking ahead and developing the habits that will help you stay out of debt long-term.
Whether you took on too much credit card debt through overspending or you’re buried under interest payments from a long-standing loan balance, instilling healthy financial habits now can set you up for success in the future.
A recent survey from New York Life explores the correlation between debt payoff and cultivating good financial habits. According to the survey, Americans who have paid down their debt are more likely to practice a number of financial routines now than when their debt was at its highest. These adults were:
- 14 percent more likely to put money into a long-term or emergency savings
- 15 percent more likely to save for a long-term purchase
- 11 percent more likely to invest money in the stock market
Alternatively, 37 percent of respondents said following a budget was their most important habit when their debt was at its highest and 46 percent would contribute to a long-term savings or emergency fund if they had no debt at all.
You don’t have to wait until you pay off your debts to begin good financial practices, though. In fact, starting to exercise those muscles today can set you up for continued success with handling your money in the future. Here are some habits you can begin while you’re paying off debt to help ensure that once it is paid, it’s gone for good.
1. Start saving
With no emergency savings, one unexpected expense, which could be anything from a medical bill to a new set of tires, could be the difference between taking on high-interest credit card debt and remaining debt-free.
Generally, you should aim to save three to six months’ worth of expenses in an emergency fund, but evaluate your own comfort level and determine what specific amount makes the most sense for you. Keep your savings in a high-yield online savings account to earn interest and boost your savings more quickly. While paying off debt, you may not have much extra income available to dedicate to saving each month, but even small amounts saved regularly add up over time.
2. Look at your finances holistically
Take some time to complete an honest evaluation of your overall financial health as it is now and what you’d like it to be in the future.
Consider the reason why you went into debt in the first place and think about both your short- and long-term goals. Have you set up your emergency savings? Do you have upcoming travel or an event you want to save for or are you looking to buy a house in the future? Do you contribute to your 401(k) or another retirement fund? Are you interested in investing beyond retirement?
If it’s overwhelming to tackle your financial outlook on your own, a financial advisor can help you find answers to your questions and work with you to put an attainable plan in place to reach your goals.
Don’t wait until your debt is gone to start painting a better financial picture for yourself.
Create a budget that is realistic and tailored to your goals and spending, so you can continue using it long-term. Evaluate the amount of cash you have coming in each month versus how much you’re spending and pinpoint exactly where it’s all going, then decide line-by-line where you can reduce your spending.
Controlling your cash flow in a sustainable way is vital to keeping your debt levels in check, and starting now is one of the best ways to put yourself on the right track while you’re still working towards debt payoff.
Bankrate’s Home Budget Calculator can help you get started developing a budget that works for you.
4. Start automating
Kick-start your savings and budgeting habits by automating your savings and expenses to better serve your goals.
If you have a regular income and can expect relatively the same amount in your account each month, automate your savings, loan payments, utility payments and whatever other regular expenses in your budget that you can. By dedicating a bit of time upfront, you can set up automatic payments through your service providers and send a certain amount of your paycheck directly into savings through your direct deposit and then forget about transferring money monthly.
Open up different accounts for each of your savings and make a rule to only use them for their dedicated purposes. Automate your 401(k) or other retirement contributions through your workplace as well, along with set annual increases.
Automation can keep you on track with your goals even when you forget about them day-to-day. If the money you earn automatically goes where it can best serve you long-term, you won’t even have the chance to miss it before it’s gone from your checking account and working better for you and your goals.
If you don’t have a plan in place to continue a healthy relationship with money after you complete your debt payoff, it can be simple to slide back into your old habits and take on more debt. Make good practices like budgeting and saving part your routine now so you can better set yourself up for success throughout your debt payoff and beyond.