How to Dig Yourself Out of Debt and Save at the Same Time

Paying down debt can be a daunting task. But with a little self-discipline and some faith in yourself, your financial picture can change for the better in about six months.

The following three-part strategy may help you control your cash flow and encourage saving so you can pay off your debt and handle the unexpected expenses that may have gotten you into debt in the first place.

Step 1: Track Spending

Begin by tracking your typical income and expenses for one month. Also figure your unexpected expenses for a year's time -- auto and home repairs, gifts, vacations, etc. -- and divide that number by 12. Once you have a record of your spending, compare your monthly outlay with your monthly income. If you have a surplus, you can apply this amount to paying down debt and building savings. If you have a shortfall, you'll need to cut expenses.

Step 2: Build Savings

Next, you'll need to establish good saving habits. Each month, use your income to first pay expenses, then dedicate whatever is left to savings or reducing your debt. Here are some tips to get you started.

Step 3: Reduce Debt

The third step -- and the one people typically find most challenging -- is actually paying down their debt. But now that you are starting to get more control over your finances with steps one and two, you can get a better grasp of how much money is available to begin chipping away at debt. To get started:

Be smart and systematic about paying off your credit cards. Here are a few tips to help:

Pay Extra and Save
$20/month Total Payments Months to Pay
6% $1,126.97 56
12% $1,353.43 67
18% $1,783.97 89
$40/month Total Payments Months to Pay
6% $1,025.24 25
12% $1,103.28 27
18% $1,199.00 29
Assumes a monthly compounding of the annual percentage rate and that the amount due (principal plus accrued interest) must be paid in full. This is a hypothetical example for illustrative purposes only.

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