So, what if I told you they are both right and yet they are both wrong. Now you are thinking if they are both right and both wrong it doesn’t matter which one you choose because there are pros and cons to both right? Wrong there is a right way, and I am going to explain it all.

Saving

Saving is always a good thing. setting money aside in case you need it is good money management and a good habit.

However, letting debt collect interest is not good money management. The reason? You will end up overpaying in the end.

If you are not used to saving, then this is the first step you should take when you ae budgeting. Learning how to save can help you live the life that you want and help you stop living paycheck to paycheck.

Many budget systems on the market today tell you to have at least $ 1,000 in saving when you began to pay off your budget. Yet they also tell you to have at least 3 to 4 months’ worth of emergency money put away.

So, which one is it? $ 1,000 in savings will not pay anyone’s bills for 3 to 4 months.

Using all extra money to pay off debt.

The sooner that you pay your debt off the less you have to pay in added interest. It will also stop debt collection calls coming to your phone on a day-to-day basis.

Also paying off your debt will help your credit score. If all your debt is paid off, then you will be living a debt free life and will be financially free.

Most budget systems tell you to use all your money that is left in your monthly income to pay off debt (because this will have them paid down the fastest). But at what cost?

Sometimes in life quicker is not always the best way to go (and in this case it’s no good).

Example

Let’s say you have $ 5,000 in debt (total debt). Your monthly bills and expenses come to $1,200 a month and your monthly income is $2,500.

Scenario 1

So, let’s say that your plan is to save up all you extra money to pay off all your debt in one lump sum.

You put $1,300 into your savings for 4 months. You end up with $5,200 at the end of 4 months.

You collect all your debt and begin to pay of the $5,000 that you owe. However, when you start to call and pay off your bills you find that they come up to more than $5,000.

This is because while you were saving your debt was collecting interest. The longer your debt sets the more interest.

So, now you have $6,000 in debt and not the $5,000 you thought you had to pay. You are not able to pay all your debt off like you planed (you pay the bills off that you can), but you have no more money in your savings (now you have to start all over) and you still have debt.

Scenario 2

Your plan is to follow Dave Ramsey and use all your money to pay off your debt.

You put $1,000 into your savings. You have $1,300 each month to use for your debt repayment. You then use the snowball debt method to repay your debt (this is one of the few things I agree with Mr. Ramsey).

You are in the 3rd month of paying off your debt. You take your monthly income and pay your monthly bills and expenses. You then take what is left and pay off a debt.

You are on your way to work, and your car breaks down (don’t you just love when this happens)

You call for a tow truck and find out that it will cost you $1,500 to get your car fixed. You only have the $1,000 that you put into your savings.

You now have to pay to get back and forth to work tell you can get your car fixed (even if you get a ride to work, you’re still going to have to help with gas). This is going to force you to dip into the money that you have in savings (this will also have you even more short on the money you need to fix your car).

So, what are you going to do?

Life is full of curveballs, just because you decided to get on track and better it doesn’t mean it’s going to stop (you know that saying ” You take 2 steps forward to get pushed 3 steps back”).

The Solution

The first rule in being frugal is to plan for the future when it comes to your money.

You do this by first learning to save. If you don’t have a saving account, you need to open one. I would tell you to open a saving account with a bank that doesn’t have rules about how much you can have in your savings (no minimal balance account).

For 2 to 3 months just pay your monthly expenses and add money to your savings account at the end of the month (this is what I call the end of the month rule). This way if something comes up you can use the money that you need.

Once you have $400 to $600 a month going into your savings then you will open up a money market account (use this type of account because your money will be making money while it sets).

Next you will split your monthly income into the 70% 20%10% budget or the 50%20%30% budget (which ever works for you and your household) you will put 70% or 50% into your checking, 20% into your savings, and 10% or 30% into your money market account (each paycheck).

This will allow you to have money set aside in more than one place (it will also help you start an emergency fund if you don’t have one).

When you start your debt repayment plan you will start with the snowball method.

In this method you start with your lowest bills first then you move up to your highest bills.

You will use the money that you have left over from your 70% or 50% to pay off debt first. You want to keep money going into your savings just in case you need it.

Once you start going into your higher bills you will use what is left from your 70% or 50% and then add what you need from your savings (but you don’t want to deplete your savings you always want money if you need it.

Your money market account is for emergences there for you do not want to touch this money for any other reason.

With this method you are doing both saving and repaying your debt. But you are also planning a head. If life happens while you are paying off your debt you have a place to pull money from at all times.

This is what I call smart money management.

Well, that’s all I have for today, I hope this helps you on your journey.

Thank you for reading Everything Frugal.

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