Navigating the complex landscape of personal finance often involves striking a delicate balance between building a financial safety net and tackling existing debts head-on. Long-term savings goals can benefit greatly from starting early and saving often—but debt, especially high-interest debt, can quickly snowball if not paid off within a reasonable time. Determining how much to devote to each important financial task can be a complex and difficult decision.
However, taking the time to understand your current financial picture and long-term financial goals can help. In this post, we'll discuss important considerations when weighing your options, shedding light on the strategic considerations that can guide you to make the best choice for your unique situation. We’ll also explore great local resources in Iowa, Minnesota, and South Dakota that can provide advice and assistance, help you eliminate debt, and begin devoting your financial resources to building your nest egg.
Understanding Your Financial Situation
Making a sound decision about your top financial goal always requires a firm understanding of your current financial situation. No matter how much money you have, your money isn’t limitless; knowing the numbers can help you determine the best ways to utilize your set monetary resources.
The first step is to create a budget that considers both your spending tendencies and your spending needs. Your spending tendencies are habits or practices that could potentially be adjusted to find more room in your budget for your financial goals. Your spending needs include
your minimum debt payments, as well as housing and utilities, food, clothing, and transportation. They may have some wiggle room (for instance, you may be able to negotiate a lower internet bill with your provider or choose a more economical vehicle), but by and large these costs are fixed and not optional.
Once you have a better understanding of your fixed budget, it becomes possible to determine how best to allocate the remainder of your income, creating strategies for paying off loans, paying down credit card debt, and saving for emergency expenses and various long-term goals. Not sure where to start? Tools like our My Money Manager and Home Budget Calculator can take the guesswork out of creating a budget.
Examine Your Savings and Debt Needs
When saving for long-term goals, like education for your children, purchasing a home, or funding your retirement, compound interest is on your side. The earlier you start saving, the larger your nest egg will be, as the interest you earn slowly snowballs overtime. Knowing how much you need to save for your goal (and how long it will take to reach it) is important for determining how to optimize your potential investment.
Equally important is understanding your debt: how long it will take to get out of it at different monthly payment amounts, how much interest you’ll pay, and how your debt is affecting your credit score. Understanding your debt and your savings needs can help better create a game plan for how to tackle both—and which goal to prioritize.
The Case for Paying Off Debt
Certain types of debt, including home mortgages and student loans, may be considered “good debt”. These are debts that tend to have lower interest rates, and by taking them on you are contributing to your financial wellbeing in some way—-building wealth through property ownership or gaining access to higher-paying jobs. Because this kind of debt has real-world benefits (and lower interest charges!), eliminating it may not be urgent.
On the other end of the spectrum are the less-than-ideal debts. This includes debt with high interest rates, like pay day loans, as well as consumer and credit card debt, where the value of the purchase is diminished as soon as you take it home. With credit card interest rates tipping the scales at over 29%, not only are your purchases not holding value, they end up costing more than the sticker price, too.
How Compound Interest Works
Credit card interest is not a flat fee. Instead, like most loans and investments, credit card interest compounds, too. As your unpaid balance accrues interest, this interest is added to the principal amount, with the interest for the next pay period calculated not just on the original debt, but also on the accumulated interest. These charges build month after month, resulting in an ever-growing balance if you fail to make more than the minimum payments, making it crucial to pay off credit card debt promptly to avoid ballooning financial burdens.
How much can credit card debt grow? If you spent $1,000 on a 29% interest credit card and only make a $30 minimum payment each month, it will take nearly 6 years to pay off the balance and the total interest will be $1,057.36—more than the original amount spent. That same amount of money could have been put to better use for your long-term financial goals.
Even if you don’t have a lot of spare cash to devote to paying down your debt, making more than the minimum payment is essential to preventing it from growing. Fortunately, there are many strategies for paying off debt, making the most of your extra funds to eliminate balances as quickly as possible, reducing possible interest charges in the process.
When Should You Prioritize Paying Off Debt?
With term loans like mortgages and subsidized student loans, making your regular payment may be sufficient, allowing you to use your extra income to save for other important life goals. But when is it important to prioritize debt?
- When your interest rates are high.
- When your balance is growing, even with regular payments.
- When you fall behind on an account and need to catch up to avoid financial ramifications.
- When your debt is preventing you from achieving a financial milestone, like qualifying for a home loan.
The Argument for Saving Money
When you have growing debts that demand payments, saving money can seem like an unattainable luxury. However, much credit card debt starts with a single emergency or setback. If you don’t have funds to pay for unexpected costs or loss of income—and have to rely on high-interest credit cards instead—it only makes it harder to get ahead financially. But saving money doesn’t just provide a buffer in the face of financial need. When you set aside money for long-term goals in interest bearing accounts and investments, you can experience a boost in your income, greater financial stability, and ultimately, greater wealth. If you need ideas for saving money, check out this 52-week savings challenge.
How Big Should Your Emergency Fund Be?
Even if you are focusing on paying off your debts, having an emergency fund as a buffer is essential for financial stability. There is a variety of advice out there for how much you should have saved in your rainy-day fund. Keep in mind that what you are able to save and what you should save may be two different figures.
Ultimately, you want to aim for 3-6 months of living expenses for emergency funds. This will cover you in the face of a catastrophic event or loss of income, allowing you to land on your feet without experiencing greater financial jeopardy.
If you are living paycheck to paycheck or struggling to come out from under debt, setting aside this amount of money may feel impossible. Don’t let that discourage you—anything is better than nothing. Consider starting smaller, with a fund of $1,000. Even if it takes you a year to accumulate this amount, this could be the buffer that prevents you from reaching for your credit card and accumulating even more debt, in the face of emergency. Considering that most Americans couldn’t cover a $1000 emergency with their savings, even a fund of this size will give you a leg up. And remember—anytime you deplete the fund, take extra care to build it back up again! You can use our accumulating savings calculator or emergency savings calculator to see how your particular situation adds up.
If you have a unique situation, such as being a college student trying to save money or get out of debt, we've got specific financial tips for you.
When Should You Prioritize Savings?
High-interest debt with growing balances cannot be ignored—but there are many times when carrying debt isn’t an excuse for skipping savings. In addition to building an emergency fund, prioritize savings when:
- Your debts are manageable, with set terms and lower interest rates.
OR
- You have a repayment plan for your higher-interest debt.
Even if you need to focus on reducing your debt, in many cases you may be able to find extra cash for those long-term goals that require many years of dedication, like retirement planning. Do what you can, even if it’s not as much as you would like.
At People’s Bank, we offer a variety of savings options including long-term FDIC-insured savings options like CDs and IRAs, Money Market Accounts (a perfect vehicle for rainy-day funds, combining interest with accessibility), and Investment Services to help you build a robust investment portfolio that aligns with your financial goals.
Loan Forgiveness and Debt Repayment Programs in Iowa, Minnesota, and South Dakota
If you are struggling to come out from under significant debt, know that there are many local resources and programs that can help you find ways to pay off your balances, whether it’s strategizing payment plans, reducing balances or interest charges, or forgiving loans. Let’s take a look at just a few options available to you by state.
Minnesota
The Minnesota Department of Commerce Debt Services offers resources and services related to managing debt within the state, providing information and assistance for individuals and businesses in Minnesota to effectively manage and navigate debt-related issues, promoting financial well-being. They also have a list of debt consolidation program requirements to help you avoid debt-relief scams—an unfortunately common occurrence.
Do you work in the medical field and have student loan debt? The Minnesota Department of Health Rural Health Loan Forgiveness Program can help eligible medical professionals reduce or dispel their related student loan debt.
Iowa
For individuals with general debt-reduction needs, the US Department of Justice offers listings of accredited credit counseling agencies in Iowa.
Another wonderful local resource for those struggling with debt and in need of legal advice is Iowa Legal Aid. This agency provides a number of services for individuals faced with a variety of debts, as well as the associated financial fallout. Utility debt? Iowa Legal Aid provides guidance on the rights of utility customers, helping individuals understand their legal entitlements and ensuring fair treatment in utility-related matters. Medical Debt? They also can provide practical advice and strategies for managing medical debt, empowering individuals to navigate financial challenges resulting from healthcare expenses. Lastly, they can help match residents with available food assistance programs, ensuring that mealtimes remain accessible and affordable for those facing financial constraints.
Health professional? Residents of Iowa in the medical field can also take advantage of special loan repayment plans through Future Ready Iowa.
South Dakota
The US Department of Justice lists a number of accredited credit counseling agencies in South Dakota, who can help you create a plan for your debt elimination.
Work in healthcare? The Indian Health Service Loan Repayment Program facilitates loan repayment for healthcare professionals working in areas served by Indian Health Services, helping to increase access to healthcare. Additional options for loan forgiveness for medical professionals in South Dakota include the Dentist Loan Repayment For Service Program, the Rural Healthcare Facility Recruitment Assistance Program, the South Dakota SLRP, and the Recruitment Assistance Program (RAP).
Get Back on Track with Peoples Bank
At Peoples Bank, we want you to achieve your financial goals, whether it’s getting out from under debt, purchasing your own home, or saving for a comfortable retirement.
Not only do we offer a variety of financial products to help you reach your financial objectives, from digital budgeting tools to retirement accounts, our team of dedicated professionals can provide one-on-one personalized assistance to help you find the best strategies that save you time and money. Stop by a local branch in North Dakota, Iowa, or Minnesota today to see what we can do for you.
