January 22, 2020

Debt getting in the way of saving for the future? Try these strategies

The problem with trying to save money is that there are just so many cool things to buy. It’s easier than ever to swipe your credit card at a store and leave with a new air fryer (or to just hit “add to cart” online), but this kind of casual consumerism can detrimentally impact your finances — especially if you’re managing debt while also trying to build your savings.

Consumers in the U.S. owe a collective $444 billion in credit card debt and another $1.16 trillion in auto loans. We love our stuff, and the internet and accessible financing options make it easier than ever to acquire almost anything. But the consumer debt that often accompanies our purchases accumulates as a burden, demanding payment even when you have other places you’d like those funds to go. But is it smarter to pay off debt or to save? It depends.

Assess your circumstances

The first step to smart debt management is figuring out just how much debt — and what kind — you have. Credit cards, student loans, car payments, medical bills, a mortgage — they’re all different kinds of debt, but each comes with its own set of considerations and rules. If you have a credit card with 20% annual percentage rate (APR), which is the average for cash-back cards, paying that off as fast as possible is going to save you more in the long run than putting your budget toward paying off a car loan with an APR of 5%. If you have a loan that provides a tax break, such as your mortgage or student debt, you might put a lower priority on paying off those than on debts that don’t get factored in at tax time.

Once you’ve identified and prioritized your debts, look at them in comparison to your monthly budget. What’s the maximum you can pay? Are there any extras you can cut, like multiple streaming services or eating out a lot? Getting a firm handle on your debts and resources is a necessary step to getting on top of your accounts and improving your financial health.

Saving vs getting out of debt

Being in debt is expensive and can build up quickly. As a general rule, the sooner you can get out of it, the more money you’ll save in the long run, and the faster you can put that portion of your budget into savings. According to numbers from the Bureau of Labor Statistics and U.S. Census Bureau analyzed by NerdWallet, U.S. households carrying credit card debt will pay over $1,100 in interest this year.

If the bulk of your debt is saddled with high interest rates, concentrating your efforts on paying off that particular account first will help you save more money in the future—even if it means draining your savings accounts today. Also, never settle for giving the minimum monthly payment if you can help it. But if you don’t have large, hungry accounts gathering rapidly growing interest, divide your efforts between paying off debt and building savings. If you’re able to put money away now, you can build up a rainy day fund that will help you avoid debt for unexpected expenses, helping to ease money-related stress and allow you to put down a larger down payment on a future house.

There’s another trick that many people don’t consider when trying to pay off debt, add to savings and increase their credit score, and that’s tapping into the equity of the home you already own with a co-investment solution. With Unison’s HomeOwner Solution, you can unlock up to 17.5% of your home’s value without having to pay it back in monthly installments with additional interest. Instead, Unison is paid by sharing a portion of your home’s appreciated value when you sell it, or after 30 years. It’s a smart way to pay off debt just by putting your equity to work.

Don’t wait

If you can start hacking away at high interest credit card debt, that’s perfect. If not, make more modest progress on your debt while slowly contributing to your savings. Whichever way you choose, waiting to start won’t help you in the short term or the long run. Don’t make the mistake of assuming having debt now means you shouldn’t start thinking about the future. If you’re hoping to save for a home while also saving for retirement, getting your debt under control will help, but these goals don’t have to wait until you’re debt free.

Likewise, if you’re considering buying a home, you don’t necessarily have to wait until you’re debt-free before checking out the housing market. If you plan on staying in an area with affordable real estate, you could be building equity in a home — and your payments might not be much different than you would be paying in rent. Conversely, if you live in a more expensive area or don’t plan on settling down for a while, you might benefit from focusing on slashing debt and building a modest amount of savings for a future down payment.

There are tools to help, too. With Unison’s home co-investment solution, for example, all you really need is to save up for 10% of the down payment - and in some cases, as little as 5%. Unison will pitch in the remaining 10-15% to help you avoid PMI and get a better mortgage rate. There are no monthly payments, and Unison is paid from a portion of your home’s appreciated value when you sell in the future, up to 30 years later. You’ll have all the benefits of a 20% down payment (like no mortgage insurance and a lower mortgage rate) without saving for years. That’s just a smart move, and it could be the difference between getting into a new home next year or getting into a new home next decade. Whatever the goal, don’t wait to start working toward it, just choose the path that fits your circumstances.

There’s no single solution to clear away debt, but making a concerted effort can chip away at that burden and help you build up your savings and assets for a brighter financial future. And if you’ve run the numbers and the budget makes sense, go ahead and get that air fryer. Just make sure you’re saving up and paying off debt, too. There are tools to help, too. With Unison’s home co-investment solution, for example, all you really need is to save up for 10% of the down payment - and in some cases, as little as 5%. Unison will pitch in the remaining 10-15% to help you avoid PMI and get a better mortgage rate. There are no monthly payments, and Unison is paid from a portion of your home’s appreciated value when you sell in the future, up to 30 years later. You’ll have all the benefits of a 20% down payment (like no mortgage insurance and a lower mortgage rate) without saving for years. That’s just a smart move, and it could be the difference between getting into a new home next year or getting into a new home next decade. Whatever the goal, don’t wait to start working toward it, just choose the path that fits your circumstances.