How to Save Money while Paying Off Debt

Is one of your New Year’s Resolutions to save money? The beginning of the year is the perfect time to plan your budget, and save money while paying off debt.

Where to Find Money for Savings

Perhaps the biggest obstacle when trying to save money is finding it in your budget. Ideally, you will plan savings into your budget as one of your basic needs (like food and shelter). But there are ways to find additional savings.

Be Frugal

Learning how to do things for yourself such as simple car maintenance (changing spark plugs, oil/air filters), mending clothes, or making your own laundry detergent can eliminate significant money from your monthly budget.

Another area to consider is groceries. Shopping sales can help you save money. Pay attention to the cycle of sales at your local grocery store – many products go on sale consistently every 3 weeks. Buy generic instead of brand name products. Beware of buying in bulk if the food is perishable and will spoil before you use it all.

Found Money

Depending on your income level, you may max out your Employment Insurance and Canada Pension Plan premiums on your weekly paycheque during the year. This gives you a small bonus for several pay periods. Commit to living on your normal take-home pay and funnel the difference into savings and debt-reduction.

Savings Categories

Consider the reasons you need to save money and write them down. Savings targets can be categorized into short-term, mid-term and long-term buckets, the same as you do for your budget. Here are some examples:

Short-Term Goals         Mid-Term Goals         Long-Term Goals

New Phone                                      Home down-payment               Exotic Vacation

New Laptop                                     New Car                                       Retirement

Gift Giving                                       Education                                    Endowment

Where to Save Money While Paying Off Debt

For short-term goals, you want money to be easily accessible and have a lower risk (which inevitably translates to a lower return). High interest savings accounts are ideal for short-term goals. The interest rate will be less than prime, but there is no risk to the principal invested.

Mid-term goals, because of the longer time frame for saving, can benefit from a more aggressive savings option. A Guaranteed Income Certificate (GIC), savings bond, or mutual fund provide reasonable security to the principal plus a significantly greater return than a savings account. These options may require a higher initial investment, but you can use a savings account until it meets the minimum threshold, then open the more aggressive option. Smaller monthly contributions are also available, depending upon the investment company used.

Long-term goals, with more time before you require the funds, mean more options available to invest in. Here in Canada you have 2 great options — the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings account. These are not products in and of themselves —they are a means of creating tax structures for other investment options. A mutual fund, stock purchase, GIC, or savings account could all be registered as an RRSP or held inside a Tax-Free Savings Account.

Pick your goals, commit to how much you’ll save this year, and choose the savings method that best meets the length of your goal. This will help you save money while paying off debt as well.

If you need help paying off debt, book your free consultation with us now.