Paying Down Debt is a Great Way to Save Money
By February 10, 2023 Money management
Consider this question: What’s your biggest financial goal — as an individual or a business owner?
For many people taking the Consumer Federation of America’s “America Saves Pledge,” one of the top responses: getting out of debt.
(The pledge, by the way, is part of America Saves Week — an annual event beginning the last Monday of February and dedicated to helping people bolster their financial health.)
If you’re reading this post — perhaps this goal also ranks high for you? And, for small to medium-size business owners managing debt wisely is key to business sustainability and growth.
If so, you’ve come to the right place. Plumas Bank and the CFA are working hard every day to help you save money, reduce debt, and build wealth. And as part of that goal, we’re focused on educating our clients and communities about the importance of saving.
Let’s take a closer look at Saving for your Past, Present, and Future - paying down debt by exploring how this saving technique ties together your financial history, your current needs, and your future goals.
Reconciling the Past: Paying Down Previous Debts
Many of us are paying off debts and loans from years in the past. Whether it’s a student loan or something else altogether, these long-standing loans often come with a long history of interest and fees.
That’s one of the ways paying down debt is actually the same as saving money: If you’re targeting old loans — with the ultimate goal of paying them off — you’re reducing the amount of interest and fees you’ll be paying, freeing up your present self to build more wealth.
Bundle up, because when it comes to paying off debt, there are two primary methods you can use — both “chilling” approaches: the snowball and the avalanche.
With this approach, you’re focusing on your lowest-hanging financial fruit — the debt with the smallest balance. So the first step is to list all of your debt in order from smallest to largest, and then you tackle these debts by paying minimum payments on all BUT the account with the lowest balance — which you’ll pay minimum payment PLUS however much more you can afford.
Thus, you’ll realize a paid-off loan in no time, then begin to chip away at the others.
Snowballs gain momentum as they roll downhill, and you’ll soon feel that financial momentum building as you pay off debt after debt.
This debt-payment technique focuses less on balance, and more on interest rate. So your first step is to identify interest rates for all of your loans, determining the loan with the highest rate — and tackling that one first. You can make minimum payments on all debt monthly, and then funnel any excess money each month toward paying down that highest rate loan.
This is also called debt stacking, and as you can imagine based on the terminology, your goal is to make a big difference by blasting those debt peaks with any extra funds you may have — with the result of saving more money down the road.
Tracey Smith, Plumas Bank Business Advisor in Chester, California remarked, “Both the snowball and avalanche methods are sound techniques to pay down debt. You will get great satisfaction with the snowball method because before you know it that debt will be gone, then you can tackle the next. The avalanche method also gives you satisfaction knowing that you’re tackling your biggest expense first and in the long run you’re getting ahead.”
Bottom line for both approaches? Don’t put that debt on ice. For more details about the snowball vs. avalanche method, check out this handy graphic.
Living in the Present: Paying Down Debt Helps Your Day-to-Day Bottom Line
Regardless of your current financial picture, if you’re interested in freeing up more resources so you can focus on your daily business goals — paying down debt allows you to do just that.
Once you’re out from under past debts, you’ll have additional funds available to take care of your current expenses, you can realize shorter-term strategies for business growth (perhaps you’re looking to acquire assets or hire additional help), and you can lay the foundation for your future financial goals.
Case in point: Samantha Griffin is a small business owner who came face-to-face with starting a people-oriented business in the midst of a pandemic right after incurring student loan debt. In this video, she discusses how the simple act of looking at her accounts keeps her grounded in present-day realities as she prepares for the future.
Another way your current situation is impacted by the idea of paying down past debts: You’ll almost always realize a higher credit score, usually within a few short months of paying down high-interest debt.
And with that higher credit score, you may qualify for lower interest loans to accomplish your future goals; this means you’ll be saving money in the future because you decided to save money now by paying down debt from the past!
Planning Ahead: How Paying Down Debt Helps Your Future Self
We’ve all heard the advice that prescribes short-term sacrifice means long-term gains, and this is true when it comes to paying off debt as well. Yes, committing to paying down debt now can mean sacrificing some of your short-term goals, but in the long run, you’ll be working toward far less debt (or even living debt-free) in the not-so-distant future.
Most small to medium-sized business owners can handle the immediate needs of their business, but there will be a day when retirement is a consideration, or when an unexpected expense creeps up. Your decision to pay down debts now will lead to far less stress and uncertainty in the future, making your business more financially sound and you a happier person.
The ultimate goal for most business owners is financial resilience. And to that end, we have tips to help you save money and reduce debt for a stronger future.
The Takeaway: Paying Down Debt Builds Wealth in the Long Term
This America Saves Week (February 27 – March 3), get up close and personal with your financial picture, and lay the foundation for a more stable future. You can thank your past and present selves for that gift!