5 Basic Steps to Start Eliminating Debt and Saving for Retirement

Taking control of your finances doesn’t have to be a long, drawn-out process. In fact, you can see some positive change as soon as you start implementing a few strategic actions that will lead you toward a foundation of long-term security.

This is especially true when safeguarding your retirement—you want to enjoy your hard-earned retirement years, whether relaxing and trying new hobbies, going out and exploring the world, or even moving to a totally new country. Read this quick, practical guide to help get you on the right path!

Assess and Prioritize Your Financial Goals

Before diving into financial fixes, clarify your goals. Ask yourself what’s important. Are you aiming to eliminate debt? Build a trust fund or start a retirement plan? Outline your objectives and then begin building out your action plan:

• List Short-Term and Long-Term Goals: Write down immediate needs. You might have debt you want to pay off quickly (like credit card debt), a savings goal to upgrade your car or another big-ticket item, or longer-term dreams like building your retirement funds.
• Rank by Urgency: Focus first on tackling the high-priority goals with the most significant impact, such as high-interest debts. Getting these out of the way will help make the road ahead much smoother!
• Set a Timeline: Allocate deadlines to each goal and check in frequently to stay accountable. Don’t get discouraged if you need to adjust your timelines—staying on target and being consistent will help you build healthy spending and saving habits over the long term.

Conduct a Personal Finance Audit

It sounds terrifying, but conducting a personal finance audit will help you make informed decisions about what to focus on in the short, medium, and long term. It’ll help you identify areas where you’re overspending and opportunities to save.

Review your bank and credit card statements, and highlight all the recurring expenses. If you’re not using a service you’re subscribed to, cancel it. You may want to look for less expensive alternatives or lower tiers to other subscriptions that you use—like meal kits, for example. If you have student loans or other longer-term payments, look into resources for consolidating, lowering your monthly costs, and other ways to reduce the strain while still paying toward the principal.

Look over all your other expenses as well and see where you might be overspending. It can be eye-opening to divide your expenditures into categories (like groceries, restaurants, entertainment, etc.) and see where your money is going. If you find small purchases are sneaking up on you—like household supplies, movie rentals, and fun gifts from Amazon—flag those problem areas and create a budget and a plan that’ll keep you within that budget.

If you find that you’re spending more than you earn, you’ve got to make a change—fast! You won’t be able to sustain that lifestyle for long, especially when unexpected (and larger) expenses come your way, like a medical bill or a car repair. Don’t let this discourage or scare you into paralysis. Your goal is to be comfortable, and understanding exactly where you stand right now will help you get your head above water and breathe easier on your way toward becoming debt-free and building up your savings.

Create (and Stick to) a Lean Budget

A well-thought-out budget is your roadmap to financial stability, as long as it’s both effective and realistic.

A general rule of thumb is to allocate at least 50 percent of your income to essentials, 30 percent to discretionary spending, and 20 percent to savings or paying off debt. This might not be realistic for your financial situation right now; you might be in a spot where you need to spend 80 percent or more of your income on essentials, and that can be disheartening—it takes a lot of work to save! Start by creating a realistic budgetary goal for your specific situation right now, and then check in regularly to adjust your allocations. As you work toward clearing debt and focusing on saving, think about setting up automatic transfers to your savings and retirement accounts so you don’t need to think about them.

Eliminate High-Interest Debt

Speaking of clearing out debt: credit card balances and payday loans will drain your finances far faster than almost any other expenses you may have. Paying off these liabilities should be your top priority.

People tackle this in many ways, including the super popular snowball method, where you pay off your smallest debts first. For example, if you have three credit cards with three different balances, put the lion’s share of your focus on paying down the one with the smallest balance first…and don’t touch that card again! (At least not until you’ve reined in your spending and what you owe elsewhere). Just don’t forget to pay at least the minimum on your other cards. Getting those small wins checked off will give you the energy boost to deal with those larger amounts later.

Alternatively, you might like the avalanche method, where you’ll focus on paying the debts with the highest interest rates first. If you’re carrying a balance on your credit card each month, you’re throwing away money. In fact, if you have a large enough balance on your cards (which could just be a couple thousand dollars), your minimum payment may be far lower than the interest you’re accruing, meaning those minimum payments you’re making aren’t even going toward the spending you actually did—they’re just going toward bank fees. It can take a while to dig yourself out of that hole, but once you start to make progress, you’ll feel so much better. And you’ll free up money to put toward both fun things, like travel!, and practical things, like retirement.

Bolster Your Retirement Savings

If you’re in your 20s, 30s, or even 40s, retirement can feel so far away and so much less important than the more urgent expenses you’re dealing with. But no matter what age you are, you’ve got to make sure that you have a financial strategy in place for safeguarding your retirement.

If you have a retirement account and are able to increase your contributions, even by a small amount, this can make a big difference over time thanks to compound interest, which works like this:

1. You earn interest on your initial contributions.
2. Then you earn interest on the interest that you’ve already earned.
3. Over time, the cycle keeps snowballing, and the earlier you start, the longer that snowball has to roll down the hill.

Let’s look at an example.

Sam is a 28-year-old with a retirement account through her workplace. She contributes $100 a month—the bare minimum, barely enough to notice it disappearing from her paycheck. The annual return on investment for her is 7%, and she expects to retire at age 65.

If she stays the course and contributes $100 per month to her retirement account for 37 years, she’ll have added $44,400 to her account all on her own. But thanks to compound interest (that 7% we mentioned), her small monthly investment more than quadruples to $178,000 by the time she’s ready to retire.

But what if she increases her contributions a little bit?

Let’s say Sam adds just $50 more to her retirement account each month, for a total contribution of $150. She’ll have personally put $66,600 into her retirement account by the time she’s 65. And with compounding interest, that total is brought up to $267,000—that’s an increase of almost $90,000!

If you don’t have a retirement account, get one. If you do have one and you’re able to increase your contributions, you’re doing future-self a huge favor by getting started early. And remember to reassess your investment allocations regularly! Make sure your retirement accounts are diversified (and therefore less prone to risk) and that they align with your age and risk tolerance.

Bonus Tips for Long-Term Financial Stability

Here are a few more quick tips for getting rid of debt, staying debt-free, and increasing your savings:

Automate your bill payments, your savings, and your investments, which will keep you consistent and away from constant reminders.

• Pay off your credit card balances in full every month so that you don’t accrue interest on them.
• Build an emergency fund (rule of thumb is three to six months’ worth of living expenses)—look into high yield savings accounts.
• Pick up well-reviewed and respected books and guides about personal finance. Stick with tried-and-true, boring methods of increasing your savings—boring is good when you’re saving for retirement.
• As you start to build your wealth, consider meeting with a financial advisor to create a custom strategy that’ll let you meet your goals and safeguard your future.

The more you know, The better equipped you will be to make some sound financial decisions.

The Bottom Line

Getting your finances in order—and even saving for a bright, happy future—can seem laughably overwhelming when you feel like you’re drowning. But you’re not alone! Understanding the issues impacting your finances and making small, actionable changes right now will lead to larger, highly impactful ones. Be consistent, methodical, and focused, and you’ll get there.

Featured image by Katie Harp on Unsplash