13 Smart Strategies: Saving Money While Paying Off Debt

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Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.

Paying off debt can be tough, but it doesn’t mean you have to put your savings on hold. With careful planning and smart strategies, saving money while working towards becoming debt-free is possible. This article explores practical tips and techniques to help you balance debt repayment and saving, enabling you to build a secure financial future. 

1. Calculate the Amount you Must Pay to Repay your Debt

Step #1: Make a personal balance sheet and put your debts in ascending order of interest rate.

Step 2: Determine the total value of your liquid assets, including any savings and investment accounts.

Step #3: List any significant purchases you must make in the upcoming year. Add this sum to the total of your liquid assets. What’s left is the possible loan payment amount.

2. Create a Realistic Budget

  1. Develop a comprehensive budget that includes your income, necessary expenses (e.g., rent, utilities, groceries), debt repayments, and savings goals.
  2. Analyze your spending habits to identify any areas where you can reduce expenses and use excess funds towards debt repayment and savings.
  3. Ensure your budget is realistic and flexible enough to accommodate unexpected expenses.

3. Prioritize High-Interest Debt

Focus on paying off high-interest debt first, as it accumulates more interest over time. You’ll save money on interest payments by prioritizing these debts in the long run. Make minimum payments on other debts while allocating extra funds towards paying off high-interest debt faster.

4. Explore Debt Consolidation or Refinancing Options

Debt consolidation involves combining more than one debt into a single loan with a lower interest rate, making repayment more manageable. Refinancing allows you to replace existing loans with new loans offering better terms, such as a lower interest rate. These options can free up more money for savings while helping you pay off your debt more efficiently.

Related: Budgeting Tips To Save You Money [And 11 Things To Stop Paying For Now!]

5. Consider the Debt Settlement Option

Settling debt can be challenging, but with careful planning and negotiation, it is possible to achieve financial relief. 

Here are some general steps to help you settle your debt:

  1. Assess Your Financial Situation: Start by evaluating your overall financial situation. Take stock of your debts, including the outstanding balances, interest rates, and payment terms. Determine your available resources, such as income, savings, and assets. Understanding your financial standing will guide your debt settlement strategy.
  2. Create a Repayment Plan: Develop a realistic repayment plan based on your financial capabilities. Consider how much you can afford to pay toward your monthly debts while meeting essential expenses. Allocate as much as possible towards the debts you intend to settle.
  3. Prioritize Debts: Prioritize your debts based on interest rates, outstanding balances, and creditor flexibility. High-interest debts or those that are past due should generally be given higher priority. Focus your efforts on settling one debt at a time while making minimum payments on other obligations.
  4. Contact Creditors: Reach out to your creditors to discuss debt settlement options. Explain your financial hardship and express your intention to settle the debt. Sometimes, creditors may be willing to negotiate a reduced settlement amount or alternative repayment terms. Be prepared to provide financial documentation to support your situation.
  5. Negotiate Settlement Offers: Aim for a mutually acceptable settlement when negotiating with creditors. Offer a lump sum payment or propose a repayment plan that fits your budget. Be persistent and patient during the negotiation process. Keep a record of all communication and agreements reached with each creditor.
  6. Get Settlement Agreements in Writing: Once you’ve reached a settlement agreement, request written confirmation from the creditor outlining the terms and conditions. This will protect and ensure both parties are clear on the agreed-upon settlement.
  7. Fulfill Settlement Terms: Once you’ve reached a settlement agreement, make the agreed-upon payment promptly. Ensure you meet the settlement terms, whether a lump sum payment or a series of installments. Retain records of all payments made and correspondence related to the settlement.
  8. Monitor Credit Reports: After settling your debt, monitor your credit reports to ensure the settlement is accurately reflected. Request a copy of your credit report from major credit bureaus and review it for inaccuracies. Dispute any errors that may hurt your credit score.
  9. Rebuild Your Finances: Once you’ve settled your debts, focus on rebuilding your financial health. Develop healthy financial habits like budgeting, saving, and responsible credit use. Strengthening your financial foundation will help you avoid future debt problems.

6. Cut Discretionary Expenses

Someone making a budgeting list with a calculator
  1. Evaluate your discretionary spending and identify areas where you can cut back.
  2. Review your subscriptions, eating out habits, entertainment expenses, and other non-essential purchases.
  3. Consider alternatives like packing lunches, cooking at home, finding free or cheaper entertainment options, and shopping at thrift stores.
  4. Redirect the money saved from these adjustments towards debt repayment and savings.

7. Negotiate Lower Interest Rates or Payment Terms

Contact your creditors and try to negotiate lower interest rates or modified payment terms. Explain your financial situation and demonstrate your commitment to repaying your debts. Many creditors are open to negotiation as they prefer receiving payments rather than facing defaults. Lower interest rates can reduce your monthly payments, allowing you to allocate more funds towards savings.

8. Automate Savings and Debt Payments

Set up automatic transfers from your checking account to a dedicated savings account. Automate your debt payments to avoid late fees and penalties. You ensure consistent progress even during busy or challenging periods by automating savings and debt repayments.

9. Increase your Income

  1. Explore side hustles to boost your income, such as taking on part-time jobs, freelancing, or leveraging your skills and hobbies for additional income.
  2. Direct the extra earnings towards accelerating debt repayment and building up your savings.
  3. Be mindful of avoiding lifestyle inflation and prioritize financial goals over unnecessary expenses.

10. Celebrate Milestones and Small Victories

Recognize and reward yourself for reaching debt repayment milestones or achieving savings goals. Celebrating small victories along the way helps maintain motivation and commitment. However, ensure that celebrations fit within your budget and stay within your progress. Consider non-financial rewards or low-cost celebrations to stay on track.

11. Make all of your Minimum Payments

This may nearly be considered “Step 0,” as it should go without saying that you should always pay off your debts on time and at least the minimum amount owed on each one. To maintain a fair credit score, you must keep your debts current. Missed payments may also result in late fees and accumulating interest, quickly sending debts out of control (and, in severe situations, even bankruptcy).

12. Create a Cash Reserve

Woman fanning out several $100 bills

Once you’re fulfilling your minimal responsibilities, it’s time to start saving money. To give yourself some breathing room in your daily life, we advise you to set aside a cash cushion of $1,000 or one month’s rent, whichever is bigger (fulfilling your emergency savings will come later after completing a few other tasks).

So, even if there are a few hiccups, you won’t have to worry about missing payments because your checking account balance is too low.

13. Compare Investing and Debt Reduction

The good news is that many of your most urgent financial demands are now taken care of, allowing you to rearrange your priorities. The bad news is that, at this point, your choices can become more difficult.

Try comparing your debt’s interest rate to our rule of 6% if you still owe money on student loans, auto loans, home equity loans, or mortgages. This might assist you in determining whether your next priority should be investing additional (unmatched) funds toward retirement or paying more than the minimum on outstanding debts. (If you do have a mortgage or student loans, make sure you’re utilizing any tax deductions on the interest you pay that are available.)

To save for retirement, you should ultimately strive to set aside 15% of your pretax income annually (this includes any employer matching contributions). Before moving on to the next item on your priority list, try to reach that goal.


Many people struggle to save money and pay off debt because they lack a plan. You may use your money to the best of your ability with the aid of a solid plan.

You can lighten the load now and feel more optimistic about the future with the help of a three-pronged strategy that combines saving, debt reduction, and cash flow control. 

You might also be interested in: 10 Ways To Budget For Your Gap Year

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