How much debt do you pay off at once? How much do I save? Three steps to managing your debt
We had our open Q&A call this week for The Money Club and I got some really great questions. One of them was: “Monica, if I have debt, how much do I pay off versus how much do I put into savings?”
I get this question all the time.
My suggestion is simple – here are the steps:
- Know your necessity number. Your necessity number is the addition of all of your average monthly business expenses + your average monthly personal expenses.
- Collect one month of necessity expenses. Pay all the minimums on your credit cards. And put any extra money into a savings account until you have at least one month of necessity expenses in that savings account.
- Sleep better at night. I see many business owners go into a panic when unexpected expenses come up – taxes, car payments, medical bills. I also see them go into a panic if a client wants a refund or an event costs more than they thought it would. I don’t want this for you. If you always have one month’s of expenses as a cushion in your account – it will keep you from going into panic mode when expenses come up.
- Keep the cushion. Always keep at least one month’s cushion in your bank account. So this means when you use it up, you must collect it again.
- Start paying off your cards. Once you’ve built your one-month cushion, you can start to pay more towards your credit cards. In my Money School program, I have a whole class devoted to paying off debt as an entrepreneur – we will be launching again in September. For now, pick the card with the lowest amount of money on it and pay more than the minimum each month.
- Build the six-month personal expenses cushion. While you are paying off your cards, pick a certain amount of money to contribute to savings each month. This can be small – even $25 is a good start. Your goal is to build up to 6 months of your personal expenses here.
Note on this one – you just need to save 6 months of personal expenses – not including your business expenses. This is to have just in case you need to take time off of your business – you’ll still have money to live on.
- Build the three-month business expenses cushion. Ok, this one can wait a few years – so don’t panic about this one in the beginning. But you do want a cushion for your business as well. So once the debt and personal cushions are created, start to work on saving three month’s of business expenses as well.
Leave me a comment below and let me know how you intend to pay off your debt.
