You Don’t Have to Be Debt-Free to Save for the Future

Living debt-free

Consumer debt in the United States is near an all time high, and if you are holding any, it can be easy to justify not saving money. While a major bulk of the nearly 16 trillion dollars of debt is in the form of mortgages, student loans and credit cards consist of close to 2 trillion dollars of it (see USDebtClock.org). For consumers trying to pay down the latter two forms of debt, it can be particularly difficult to find any margin to set aside for a rainy day or savings for the future. As hard as it may be, it is wise to do everything in your power to begin contributing to an emergency fund, and then a retirement savings account, even in the midst of debt repayment.

Emergency Funds

Though you have most likely heard (or read) several exhortations from financial pundits or concerned family and friends about a “rainy day fund”, pleas for you to begin and maintain an account for emergency savings are hardly ever redundant. If you have already set your mind and will to paying off your debt, you likely want to do it as soon as possible. That mentality should be commended. However, if you are using all of your liquid assets to pay your creditor back each month, just a small mishap might force you to borrow again (and thus add to your debt). In addition to the advice of storing up 3 to 6 months worth of funds to cover expenses in the event of a costly circumstance, the ease of conversion factor should also be a consideration. You may have some convertible assets like a car or diamond necklace that you consider “sell if I have to” items, but you still need to factor in how long it would (realistically) take to convert them into the cash you would need to cover an auto repair or a family member’s medical expenses, for example. Markets and market demand change quickly, and it could take you longer than you think to convert your things into cash.

Savings and checking accounts are the easiest options for these emergency savings, as most of them gain interest but don’t penalize you for withdrawing funds (unless the account has particular minimum balance requirements). A lot of savings accounts come with an ATM card or checks for easy access, but if not, an ACH fund transfer to a linked checking account is a simple workaround. Certificates of Deposit can be utilized as well, but timing is a little trickier. Most CDs come with early withdrawal penalties that would force you to give up some of your interest if necessity demanded you take money out in an emergency situation. That is, unless you could perfectly time your financial emergencies to occur during the grace period between CD terms. Bank5 Connect offers all of these products, and with some of the best interest rates available nationwide.

Retirement Savings

If you can establish a healthy emergency fund, then you will have built a great foundation upon which to focus on more long-term savings. Many consumers focus on paying off their student loan and credit card debt once they’ve established some emergency savings, but depending on the interest rates of your loan(s), it could be beneficial to maintain some level of dedication to savings. If your loans are accumulating interest at a lower rate than the returns you expect to be making on your retirement investments, then reducing loan payments in order to profit from the margin may be a wise move. That margin could ultimately help you pay off your loans more quickly in the long run. There are numerous places to look for investment options, from insurance products to mutual funds to IRAs. If you are able to open and fund a long-term retirement vehicle early on, you will have more years with which to potentially benefit from the power of compounding growth.

Finding Margin

Obviously, it would be easy to build both an emergency and retirement savings fund if you actually had some margin to spare between money coming in and expenses going out. As the economy continues its struggle to rebound from the recession, finding places to create this margin is no simple task. In addition to the above strategy of redirecting some debt repayment funds, you should also maximize the benefit of any employer’s retirement contribution matching program. For low and average income workers, taking advantage of the saver’s tax credit is another great avenue to increase the effectiveness of your saving efforts. Also, though it sounds minor, paying your bills on time (as opposed to early) will give those funds in an interest-yielding deposit account more days to accumulate interest.

Making the push to get your emergency savings account set up is a crucial first step to striking a workable balance between growing savings for the future and shedding debt in the present. Though everyone with consumer debt has a unique situation, the above tools should help you evaluate the most effective (and profitable) path to taking advantage of potential savings opportunities.


Patrick Russo writes for DepositAccounts.com, a website that monitors products and rates at more than 7,500 banks and credit unions and pairs that information with comprehensive commentary, reviews, tools, and community forums to equip and guide depository banking consumers.

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