Financial planner: 'The best way to pay off your debt is to start saving' — here's why

Pamela Capalad is the founder of Brunch & Budget.
Courtesy Pamela Capalad

"Wait, so you're saying I should take any extra money I have and put it into a savings account and not towards my credit cards?" My client looked skeptical.

I nodded as I took a bite of my omelette. I started Brunch & Budget in 2015 because I'd had so many friends who were ashamed and afraid to look at their finances. Talking about money while breaking bread together helped us find common ground and made the conversation more, well, digestible.

"But I want to pay off the debt as fast as possible," she said. "Isn't that what you're supposed to do?"

"How long have you been trying to pay off your credit card debt?" I asked.

She paused, staring at her Bloody Mary. "11 years," she said. "Huh."

This client is so many clients I sit across from during a Brunch & Budget meeting who are trying to get out from under their credit card debt. One thing I've learned over the years is the best way to pay down your debt is to start saving.

When it comes to debt, it can be tough not to feel embarrassed by it. You may be paying tons of interest, on top of the debt you've already accrued, and you feel a sense of obligation and responsibility to pay it off as quickly as possible.

But what I see happening over and over again is that the people who are constantly paying off credit card debt never seem able to get rid of it. Even the most well-intentioned debt advice often doesn't take into account the reality that life happens.

One thing I've learned over the years is the best way to pay down your debt is to start saving.
Pamela Capalad
Founder of Brunch & Budget

When you put all your extra resources towards debt and the inevitable unexpected expense comes up, you don't have any savings to cover it, so you end up doing what you've always done — putting it on a credit card. Over time, being in debt becomes a habit.

To change out your debt habit, start a savings habit. Here's how:

1. Switch to debit

The first step to paying down your debt is to stop increasing it. Switch all your spending to your debit card. This means removing any auto payments, un-linking your credit card from places like Amazon, Uber, and Grubhub.

Painful as it might sound, switching all charges to your debit card or bank account is the first step.

2. Make only minimum payments for a few months

We've all been told not to just make the minimum payment on credit cards. Always try to pay a little bit more, right? But the odd $50 to $100 inconsistently paid towards debt doesn't necessarily do much to move the needle.

Instead, put that money towards building up your savings. To help you transition to using your debit card, make minimum payments on your credit cards for a few months while you work on stabilizing your debt.

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3. Treat saving like a bill and set it to autopay

Start a savings habit in the midst of having debt by getting out of your own way. Treat your savings account like another bill and set up an auto payment into a savings account. It can be as small as $25/month or $10/week.

If you've been putting extra payments towards your credit cards, switch those extra payments to a savings account instead. This will allow you to create a savings cushion to cover those unexpected expenses. As one of my clients once put it, "It's like giving myself a credit line."

4. Create a manageable debt-payment plan

After switching to debit, making minimum payments, and regularly sending money to a savings account, you will most likely see your debt amount begin to stabilize and have a clear idea of what your expenses are outside of credit card payments.

Now it's time to create a debt pay-down plan that fits into your budget. There are a ton of different methods out there and it doesn't matter which one you choose as long as the plan is something you can afford to do each month without sacrificing your ability to save.

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5. Put extra income towards savings, not debt

What should you do with that tax refund? How about your annual bonus? The birthday check from your grandma? Your first instinct might be to put it towards paying down debt. Doing that would reinforce a debt habit.

Instead, I would recommend putting your extra income towards savings to accelerate your savings growth.

As long as you have a plan for paying your debt, you can start working on building your savings. Remember, saving is an action, not an amount. Before you know it, you'll have made a dent in your debt and also have money in the bank.

Pamela Capalad is a certified financial planner and accredited financial counselor and has been in financial services since 2008. She founded Brunch & Budget to help people who felt ashamed or embarrassed about money have a safe place to make real financial progress. She co-hosts the Brunch & Budget podcast and co-founded the Race & Wealth Podcast Network. She runs a group financial planning program for people of color called See Change.

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