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Thinking about the future is a great way to motivate yourself to stick to a debt repayment plan.
When identifying goals that motivate you, it may not seem like as big a sacrifice as spending a few hundred dollars on eliminating high interest debt each month. The faster you pay off your balances, the faster you can enjoy the other pleasures of life without stress debt management.
But there is another advantage. Creating a debt repayment strategy requires forethought and responsibility so you can be successful pay a big balance over time, and that success can help you build good financial habits.
And it turns out that you also need the same skills and habits to save money over time, too much.
Below, CNBC Select spoke with Bridget Todd, trainer development manager at The financial gymnasium to learn how the skills you need to break free from debt can actually help you get started on your savings. She explains the importance of automating both your debt repayments and your savings, and she shares tips on how to start building your emergency fund.
Whether you pay off your credit cards with a debt consolidation ready or just put your bills on automatic payment for an amount that works with your budgetPaying off debt can teach you a lot about how to put money aside each month.
If you spend, say, $ 500 a month paying down your debt, you already have the discipline to invest that money in a savings account.
It’s all about consistency, says Todd, “One of the best things you can do is automate your savings. And it’s easier than you might think. By setting aside just $ 20 per week, you can save $ 1,000 in one year.
But if you’ve ever paid off a monthly debt well over that $ 20 a week, you’ve probably built savings muscle without realizing it and proven to yourself that you can find room in the budget. to save when the debt is gone.
Once you’ve paid off your debt, take that amount and redirect it to your savings account using direct deposit or automated transfer. Todd recommends setting up an automated transfer directly from your check to your savings on the day you get paid.
“Remember, you weren’t using this money to spend before, so you don’t have to spend it now!” ” she says.
Having a financial plan in place before you start paying off your debt will keep you on track and focused, says Todd, who suggests that you should have a goal you’re working towards and set specific dates for your goals when possible.
“Paying off your consumer debt is a key part of planning for your future and will give you financial freedom,” she says.
So while paying off debt isn’t the most enjoyable process, being diligent in the short term can lead to significant results in the long term.
“Your future self will thank you for making wise financial decisions now,” Todd said.
When a person is finally free from debt (at least consumer debt), their number one goal should be an emergency fund.
“A fully funded emergency savings is six months of total spending saved in cash, preferably in an account earning at least 1% interest,” says Todd.
Unlike traditional savings accounts, high yield savings accounts come with higher interest rates, helping your money grow even faster with compound interest. The higher your Annual Percentage Return (APY), the better the return you get compared to a traditional savings account, which is on average around 0.06% APY at present.
The Marcus High Yield Online Savings by Goldman Sachs ranked best overall on the CNBC Select list of best high yield savings accounts. And if you want to open a new check / savings combo, Ally Online Savings Account is a good choice because account holders can enjoy additional perks when they also have an Ally checking account, including easy access to toll-free ATMs and faster transfers from verification to savings.
Once you’ve built up a fully funded Emergency Savings Account, you can focus on saving for other priorities like buying a home or optimizing your retirement.
Saving and paying off debt require very similar skills. While it is difficult to get rid of debt, it helps to know that you are learning habits that will result in an increase in your net worth in the long run. When you finally have no more debt, start your savings by putting the same amount of money from your budget in a high yield savings account.
Information about Marcus by Goldman Sachs High Yield Online Savings and Ally Online Savings Account was independently collected by CNBC and was not reviewed or provided by the bank prior to posting.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.