You may not be able to meet your savings targets in addition to paying down debt as quickly as you would like, given your current cash flow. In these instances, one approach to take is to pay down debt more aggressively and assume savings increases in the future as income increases and debt is paid off.
For example, while a couple might be able to save $30,000 per year for the next few years, that figure could increase to $40,000 per year once a second mortgage is paid off.
Layering savings can change a plan that looks marginally successful into one that has a high probability of success. The key in layering savings is to avoid lifestyle creep, in which you find you have more expensive tastes as your income increases.
Paying off debt is a longer-term project for most of us. By prioritizing debt to be paid down and striking a balance between saving and retiring debt, you can pay off your debt within the longer-term context of achieving your financial goals.
(Editor’s Note: This column originally appeared on Investopedia.com.)
— By Micah Porter, owner and president of Minerva Planning Group
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