9 Simple Steps to Buy a House for the First Time

Learning how to buy a house is an exhausting, confusing, and often frustrating procedure.

There’s so much to understand and process, from selecting the right mortgage to picking the right real estate agent to financially preparing for homeownership. It’s easy to get intimidated.

The best way to avoid that is to increase what you know about buying a home.

Because the more you know, the better choices you can make. And when you make informed choices, you save yourself time and money and end up purchasing the home of your dreams.

Table of Contents

  • How to Buy a House in 9 Simple Steps
    • Step 1: Get Financially Prepared
    • Step 2: Determine Much House You Can Afford
    • Step 3: Settle on Where You Want to Live
    • Step 4: Determine How Much You Need for a Down Payment
    • Step 5: Get Pre-Approved for a Loan
    • Step 6: Find a Buyer’s Agent
    • Step 7: Find a Home You Love
    • Step 8: Submit an Offer
    • Step 9: Move In!
  • Buying Your First Home Can Build Long-Term Wealth

How to Buy a House in 9 Simple Steps

As long as you follow a step-by-step plan when buying a house for the first time, you can avoid much of the stress that accompanies the process.

Step 1: Get Financially Prepared

Before you even consider where you want to live and how much house you can afford, you should ask yourself “how should I financially prepare for buying a house?”

Pull Your Credit Report

Whether you have good or bad credit, you want to pull your credit report to know where you stand.

You can look at your credit report from each of the three main credit bureaus for free once a year. Go to AnnualCreditReport.com, fill out the required information to confirm your identity, and review your report. If you have problems or any issues with some accounts, you’ll find those at the top of your credit report. Take note of them so you know where to begin fixing your credit.

Even if you think your credit history is excellent and there are no adverse issues, still check your credit score and report. There could be a mistake in it. For instance, maybe you’ll find an account in collections from the public library for not returning a book. It seems small and inconsequential, but it makes a difference when you’re shopping for a mortgage.

Lenders don’t like to see borrowers with adverse accounts or any accounts in collections, so be sure to resolve those before talking to a bank about a home loan. An easy way to view your credit report and get help with challenging any adverse actions is through a service like Credit Karma.

Credit Karma is a free credit reporting and monitoring service that provides your credit score from two credit reporting bureaus, giving you a more comprehensive picture of where you stand. You can get updated scores every week as well, which is helpful if you’re actively working to improve them.

Improve Your Credit Score

If your credit score isn’t great, you can use your credit report to find valuable information for improving your score.

To start, it’s good to know what variables affect your credit score. These include:

Payment History 35%
Accounts Owed 30%
Length of Credit History 15%
Credit Mix 10%
New Credit 10%

Looking at this breakdown, you can see what a huge role your payment history plays in your credit score.

Your payment history is the record of all the bills you’ve paid on time. Banks prefer a history of timely payments because it means they will likely get paid on time if they loan you money.

If you have late payments on your credit report, don’t stress. You can’t undo the past. And although your late payments over 30 days will remain on your credit report for seven years, you can work to demonstrate that you are now current on all of your accounts.

Be prepared for your potential lender to ask about any late payments. If they do, explain honestly why the payments were late and how you’re working to fix the issues. Point to your current good standing with your accounts as proof. They will hopefully take that into consideration and lend you the money.

Don’t Take Out New Loans

Once you start the home buying process, try to avoid taking out new loans. Although part of your credit score relies on a good account mix, this is not the time to add new accounts to your report. Taking on new loans, even if you can technically afford them, can affect your credit score and your debt-to-income ratio, or DTI.

So while you’re in the middle of checking your credit, getting pre-approved, and seeing how much home you can afford, it’s a good rule of thumb to avoid taking out any new car loans or applying for new credit cards.

Eliminate High-Interest Debt

Another quick way to improve your credit score is to pay down any outstanding debts you may have. The amount of money you owe in relation to your credit limits makes up 30% of your credit score. If you’re maxing out your credit cards and using up most of your available credit, you’ll have a lower score. Before applying to lenders for a home loan, try to pay off as much consumer debt as possible to improve your score.

If you need to find a way to get extra money so you can pay down debt, you have two options: cut back on expenses or earn more money. If you’re not sure where to start with cutting expenses, create a budget. List all of your bills, subscriptions, monthly obligations, and other debts to see where you have room to reduce the cost. If you’ve never made a budget before, the 50/30/20 budget format is easy to follow and use.

You can also use a service like Trim to help you navigate through cutting expenses by doing the work of canceling unwanted subscription services and negotiating bills on your behalf. You can learn all about the service in our Trim review.

If you feel like you’ve cut back on as many expenses as you can, the next step is to pick up a gig to make more cash.

Here are a few examples of ways you can earn extra money:

  • Rent out a room on Airbnb
  • Deliver groceries with Instacart
  • Deliver take out with Uber Eats
  • Start an online business

Make sure you’re using this money to eliminate your outstanding debts (or save for your down payment) rather than using it for frivolous expenses.

Set a Monthly Savings Goal

Once you’ve pulled your credit report, repaired adverse accounts, and worked to get out of debt, it’s time to set monthly savings goals. You’ll need a down payment, ideally 20% of your home purchase price (although you can purchase a house with a smaller down payment), and enough money for closing costs in order to buy a house.

In order to stay motivated to save money every month, put a picture of your dream house on the fridge. Set reminders. Work together with your spouse as accountability partners to reach your goal of homeownership. If you’re single and buying a home, find accountability through your parents, coworkers, or friends.

As far as where to keep your down payment savings, consider a high-yield online savings account, which is preferable to investing for short-term goals like buying a house. This way, the money is earning some interest while you save to buy your home.

Related: 12 Ways Renters Can Save for a Down Payment

Step 2: Determine Much House You Can Afford

Banks often approve people for a bigger mortgage than they need, but that doesn’t mean you have to use all of it. You know how much house you can afford, and that’s what you should stick to. But how can you figure that out? Use the rules below.

28% Rule for Mortgage Payments

The 28% percent rule means that your mortgage payment should be 28% of your gross monthly income or less. Some financial experts actually recommend that it should be 25% of your monthly income or less.

Keep in mind that your total income is your gross income, not net income. Gross income is what your paycheck looks like before taxes, health insurance, and other expenses are deducted. Net income is your income after those expenses have been taken out.

If you live in a higher cost of living area like the New York City metropolitan area or in parts of California, this percentage might be higher. Keep in mind, though, that the goal is to not overextend yourself. By sticking to the 28% rule, you will have a house payment that’s manageable with your gross income.

32% Rule for Total Housing Costs

The 28% rule mentioned above applies just to mortgage payments, but there are more costs to consider when buying a home. For example, you’ll have to pay homeowner’s insurance, and if you put down less than 20% in a down payment, you’ll likely have to pay for private mortgage insurance (PMI), too.

The 32% rule says that all of these payments combined — mortgage, PMI, and homeowner’s insurance — should not exceed 32% of your gross income.

40% Rule for Total Monthly Debt Payments

Lastly, if you have other debts you’ll still be paying as a homeowner, like student loan debt, credit card debt, or a car loan, stick to the 40% rule. This rule says that the total of all of your debts, including your house payment, should be no more than 40% of your total gross income.

While these percentage rules aren’t set in stone, they provide good guidelines to ensure you can afford not only your mortgage payment but your other bills, too. You don’t want to overextend yourself or your finances.

Buying a home isn’t a quick process, but it is a worthwhile one. And once you get your finances organized, you can start thinking about where you want to live.

Step 3: Settle on Where You Want to Live

When you’re deciding to buy a house, you also need to decide where you want to live. It might seem like you already have the answer or even know the exact neighborhood you prefer, but it’s important to keep an open mind when you’re buying a home.

What to Know About Desirable Neighborhoods

Sometimes, highly desirable neighborhoods also have high markups. You might be surprised to find an equally beautiful, but less expensive, neighborhood just 15 or 20 minutes away from where you think you want to live.

If you’re set on living in a certain neighborhood, consider buying the least expensive house in the neighborhood. If you have DIY skills or are willing to invest more in your home over time, you could increase the value of an older home simply by updating or renovating it.

Consider School Districts

If you have children, carefully research school districts’ zoning maps or feeder patterns. You don’t want to think the house you’re buying is squarely in the district you want only to realize later that it isn’t. Also, every school district is different. Some allow you to go to any school within the district while others only allow you to go to the school closest to your specific neighborhood.

It’s important to know that information ahead of time as it might affect where you choose to buy a house.

If you don’t have kids yet and plan to have them in the future, consider homes that are further out from your desired area. Specific neighborhoods near good school districts might be too competitive, and it might be wise to buy a less expensive home, build equity, and then move into a specific district once you have children.

How Long Do You Want to Live There?

Buying and selling homes can get expensive. There are closing costs, real estate agent fees, and moving costs to consider. It’s not something you should do every year or even every few years because of these expenses. Ideally, strive to live in a home for at least five years before you consider selling it. This allows your home time to appreciate in value before you sell.

When you’re thinking about where to live, consider how long you want to live there. If you want kids, try to picture your future family living in that home as well. Will it accommodate more than one kid? Pets? Aging parents? Take all potential variables into consideration when deciding how long you can comfortably live in a house.

Step 4: Determine How Much You Need for a Down Payment

Saving for a down payment is an important part of the home buying process. It takes discipline to save several thousand dollars for this purpose, and the more you save, the bigger percentage of your home you will own and the lower your mortgage payment will be. A first-time home buyer down payment isn’t any different from an experienced home buyer down payment.

Here’s what you need to know about down payments.

Most Lenders Prefer 20%

If you want to qualify for a conventional mortgage, lenders prefer that you put 20% down on a home. Let’s say the house you want to buy is $200,000. This means you should save $40,000 for your down payment.

Keep in mind your down payment doesn’t cover other costs associated with closing on your home. You’ll still need to save additional money for the inspection, closing costs, and realtor fees.

Put as Little as 3.5% Down with an FHA Loan

If you’re wondering how to buy a house with no money down, an FHA Loan might be your closest option.

Not all home loans require 20% down. If you qualify for an FHA Loan, which is a common option for a first-time home buyer loan, you can put down as little as 3.5% to purchase your home.

Keep in mind, though, if you only put down 3.5%, you might be subject to a higher interest rate as well as PMI.


PMI, also known as private mortgage insurance, is an additional bill you have to pay if you put down less than 20% on a home. This isn’t money that goes towards paying down your mortgage loan, although it can be rolled into your monthly mortgage payment. It is an insurance payment that you make.

Because you put down less than 20% on your home, the bank considers you a riskier borrower. The insurance protects them should you ever foreclose on your home.

One thing to note is that once you’ve paid the mortgage down to 80% of the home’s appraised value, you can ask your lender to remove the PMI. So while you’ll have to pay this for a while, you can initiate the process to have it removed.

VA Loans

If you served in the military, you might be eligible for a VA loan. VA loans are a different type of loan because you can buy a home for $0 down without having to pay PMI. The reason is that a portion of each VA loan is backed by the federal government. There are fees and potentially higher interest rates with a VA loan, so it’s important to compare the pros and cons of a VA loan versus a conventional mortgage before deciding which is best for you.

USDA Loans

The USDA offers zero down payment, low-interest mortgages for eligible home buyers in rural and suburban areas. They are issued through the USDA Rural Development Guaranteed Housing Loan Program administered by the United States Department of Agriculture.

There are income eligibility requirements, and the property must be in a USDA-determined rural area. But if you, and the homes you’re interested in, meet these requirements, these loans are a solid mortgage option.

First-Time Home Buyer Programs

If you’re buying your first home, it’s important to see if you qualify for first-time home buyer programs. The FHA loan program and the VA loan program are options, but there are others, like the HUD Good Next Door Neighbor program, which helps teachers, firefighters, police officers, and other personnel buy their first homes.

There are also other first-time home buyer benefits, like grants, that you can apply for. You can find those grants by talking to your real estate agent or brokers because many of these grants are state- or income-specific. You can also look online to see what grants might be available to you in your area.

Don’t Forget About Closing Costs

As mentioned, you’ll also need to save for closing costs. Some buyers do ask the seller to pay for part or all of closing costs during the sale, but you shouldn’t count on this. Instead, speak with your real estate agent to get an estimate of closing costs. By law, they are required to give you the exact amount you have to pay in closing costs a few days before your closing date.

Beware of Wire Fraud

In the days leading up to your closing date, you’ll get information about where to send your money for closing. Unfortunately, over the past few years, there have been numerous reports of wire fraud and phishing scams.

Hackers can break into your real estate agent’s email, and instruct you to send your money to a completely different account. Once you wire money to the wrong account, it’s very difficult to recover it. Make sure to call your real estate agent before wiring to confirm the correct account numbers over the phone before sending your payment.

Tax Credits and Deductions

In your research of home buyer benefits, you might come across information on first-time home buyer tax credits. That’s usually referring to the federal tax buyer credit that President Obama created during the 2008 recession and housing crisis. Unfortunately, that tax credit is no longer to new homeowners.

However, all homeowners can deduct the interest paid on their mortgages on their taxes as well as several other expenses, like moving costs. Once you become a homeowner, it’s important to research any change in tax law as it relates to owning a home or consult an accountant to ensure you’re getting the biggest tax benefits possible.

Step 5: Get Pre-Approved for a Loan

As evidenced by this list, it might take some time to financially prepare to buy your first home. All of that is important because it leads you to a crucial home buying step: securing a loan.

Pre-Qualified vs. Pre-Approved

You might have heard two terms when it comes to getting initial bank approval for a home loan: pre-qualification and pre-approval.

Pre-qualification happens when you submit your financial information to a lender, either over the phone or online, and they provide an approximate home price you can afford based on that information. This is not a guarantee for a loan; it’s more of a snapshot to let you know where you stand. Think of it as the first step in actively searching for a home to buy.

If you do not get pre-qualified based on your financials, you know that you have to continue to work on your credit, save more for a down payment, and do whatever else is needed to purchase a home.

If you do get pre-qualified, you can begin looking for a buyer’s agent. Eventually, you will need to get pre-approved for a loan, which is different from pre-qualification.

Requirements for Pre-Approval

Mortgage pre-approval is more official than pre-qualification. Pre-approval acts as a conditional commitment from the bank to give you a mortgage. As such, you’ll need to provide a lot more information than you did during the pre-qualification process.

Here is a list of documents your lender will likely request during pre-approval:

  • Proof of income
  • Proof of assets
  • Employment verification
  • Identification documents
  • Social Security numbers to run credit

Your lender will review all of this information, and you should be prepared to answer some questions. For instance, they might ask you to explain past credit mistakes or ask for previous employment data. If you’re self-employed, you will likely have to show two years of profit and loss statements from your business. If you haven’t been in business for two years yet, you might have to delay the homeownership process until you can prove you have a steady income.

After your lender reviews these documents and determines that you’re a good risk (meaning you’ll pay them on time and not default on your mortgage), you’ll get an official pre-approval letter. The pre-approval letter is a key piece of the home buying process. It demonstrates that you’re serious about purchasing a home and that you have the money available to do so. In fact, some listing agents won’t even show homes to prospective buyers who haven’t been pre-approved.

Having that letter removes the risk of you being denied a loan after making an offer. It also often makes listing agents more willing to work with you.

Related: 10 Home Buying Mistakes That Could Cost You Thousands 

Step 6: Find a Buyer’s Agent

Finding a good real estate agent is integral to buying a home. You want someone with experience, patience, and a willingness to help you through this process.

Keep in mind that not all real estate agents are Realtors. A Realtor is a special designation that real estate agents can get for being members of the National Association of Realtors, which has a strict code of ethics they must abide by. Here are a few ways you can find a real estate agent or Realtor.

Word of Mouth

Start your search by asking friends and family members for recommendations of real estate agents in your area. Ask why they recommend them. Is it because they got them a good deal? Is it because they carefully explained the process?

You want to find an agent who will help you through this process whether it’s your first time buying a house or your tenth.

Online Search

Some of the most popular websites to find real estate agents are Realtor.com, Redfin, and Zillow. Carefully and thoroughly read all the reviews to make sure the person you want to work with is responsive and knowledgeable about your area.

Buyer’s Agents vs. Listing Agents

When you’re buying your first home, you’ll be looking for a buyer’s agent.

Although real estate agents can do both, sometimes they specialize in one or the other. A listing agent is an agent who lists your home for sale. They’ll be responsible for helping you price the home, inviting buyer’s agents to come to open houses, and more. A buyer’s agent, on the other hand, works just with you — the buyer — to help you through the whole home buying process.

It’s okay to be picky when selecting a buyer’s agent so if you don’t feel comfortable with the first one you find, move on to another. You want someone you can trust to look out for your best interest. After all, this is the person who’ll be your advocate on everything from negotiating the selling price to what the seller will pay during closing (think commissions, closing costs, etc.) to helping you find a fair and unbiased home inspector.

Step 7: Find a Home You Love

Now that you’re pre-approved for a loan and have a buyer’s agent, it’s time to start looking for your home. An easy place to start is browsing listings online. You can even attend open houses in neighborhoods you’re considering.

Research Homes Online

You can browse public listings on sites like Zillow or your real estate agent might give you access to a private portal that shows you homes that match the criteria you want. You can continuously refresh this portal to find the newest homes for sale in your desired neighborhoods.

This is especially beneficial if you’re in a competitive housing market where homes go quickly.

Visit a Lot of Homes

Your buyer’s agent should ask you for a list of the things you want in a home. It’s okay to be as detailed as possible; give them your comprehensive wish list for your ideal home. Ultimately, you might not be able to get everything on your list, but it will give your agent a good idea of what you’re looking for.

That list will give you a starting point for homes to visit. As you see them, you might find other things you want or realize that you don’t actually need a fireplace or a large backyard like you thought. The more homes you visit, the more you’ll discover the right home features for you.

Keep frequent and open communication with your real estate agent so they know if your preferences change.

See Beyond the Decor

When you visit an open house, try not to get distracted by the decor. You shouldn’t walk into a living room and say, “Oh, I love the furniture,” because the furniture most likely doesn’t come with the home. Instead, pay attention to the things beyond the decor, like the high ceiling, multiple windows, and more permanent features.

If you are adept at seeing beyond decor, you could also get a great deal on a home. For example, you might tour a nice, well-built home with the layout you want, but it’s full of floral wallpaper. Many buyers might be put off by all the work that removing wallpaper entails. But if you can see beyond it, you might get a solid house for a good price.

Only Visit Homes In Your Price Range

Make it clear to your real estate agent ahead of time that you only want to visit homes in your price range. If you can’t find a home you like, your agent might try to convince you to increase your budget by $10,000 or $20,000 so you can get certain features you want in a home.

Stand firm that you don’t want that, and that you’d prefer to keep looking. Your real estate agent should respect your decision.

However, you might find that you need to make compromises to stay within your budget. For example, let’s say you want a home with two bathrooms but you can’t find one in your price range. You might have to settle for a home with only one bathroom. Staying within your pre-established price range will keep your monthly budget manageable and, when finances allow for it, you can always upgrade your home.

It’s important to stick to your budget because if you start out with something you can’t afford, it could become a hindrance. You don’t want to be house poor before you even get the keys.

Step 8: Submit an Offer

Submitting an offer can be an anxiety-ridden experience, especially in a competitive market. This is where your buyer’s agent can be most helpful.

You might submit offers that aren’t accepted, and you have to start your search all over again. And sometimes you have to adjust your offer to make it stand out.

This is not to say you should always offer over asking price or make other concessions like letting the seller live in their home beyond the initial closing date. But you should know your market well.

If you keep making offers on homes that are being rejected, it can be frustrating and disheartening. Talk to your agent about why it keeps happening and ways to prevent it in the future.

It’s also important to be flexible and understand that you might not get your initial dream home. Fortunately, there are many beautiful homes on the market, and the right one for you is out there.

If Your Offer is Accepted, the Escrow Process Begins

Once your offer is accepted, the escrow process begins. This means that you won’t get the keys to the house the day after you buy it. It can take 1-2 months to go from an accepted offer to walking in the door.

At the beginning of the escrow process, the buyer will deposit what’s called earnest money into the escrow account. This is a sign of good faith while the escrow agent reviews all documents related to the sale.

Get a Home Inspection

During the escrow process, you’ll also arrange a home inspection. If something in the house needs to be updated or repaired, you’ll negotiate those repairs during this time period. You’ll also arrange for an appraisal of the house and finalize your financing during this time period.

Keep in mind your lender will not finance a house for more than it’s worth, so if your home appraisal comes back as less than the agreed-upon purchase price, you’ll have even more negotiating to do with your seller.

Sometimes, if buyers really want a house and the seller won’t lower the price, they’ll pay the difference between what a home is worth and their offer. This is not usually recommended, though, especially if you put 0% down on your home. You don’t want to owe more on your home than it’s worth.

Protect Your Home with Insurance

Lastly, you should get insurance on your home before moving in. In order to get the best price, obtain quotes from different insurance companies. Read the policies and what they cover before choosing one. You want to make sure it’s comprehensive enough to cover exactly what you need.

Keep in mind that you might get the best savings by using a company you already do business with. Insurance companies like it when you bundle multiple insurance policies and are often willing to give you a discount as a thank you for being a loyal customer.

Step 9: Move In!

Now that you’ve found your home, here are some tips for ensuring you continue to stay in your home for years to come.

Have a Robust Emergency Fund

Homeowners should have an emergency fund with at least 3-6 months of living expenses in it. This fund will give you incredible peace of mind. If you lose your job unexpectedly, you now have 3-6 months to find a new job without worrying about losing your home. You can also use this money for unexpected major repairs like replacing your hot water heater or fixing a flooded basement.

If you’re looking for a high-interest bank to park your emergency savings while still providing you easy access to your money, check out our list of the best online savings accounts.

Maintain It Often

You don’t want minor issues to turn into major repairs. A leaky sink, dirty fireplace, or bad outlet are all small, inexpensive fixes, but if left unattended for too long, they can turn into expensive projects. Make sure you’re performing routine maintenance on your home. That includes everything from changing the air filters to replacing smoke detector batteries to fixing that creaky step.

This also applies to cosmetic maintenance. Touch up paint when it’s needed or replace your carpeting before mold becomes an issue (of particular concern if you have pets who might have accidents in the house). Keeping up with these tasks now when they’re manageable prevents you from having to use your emergency fund later.

Properly maintaining your home over time makes it healthier, more affordable, and ensures that it grows in value over time.

Avoid Overextending Yourself

Your home is one of the biggest purchases you’ll ever make. You didn’t want to put a strain on your budget with a mortgage you can’t afford. And you don’t want to strain your budget now by using your home equity as a bank account.

Once you’ve been living there a few years, it’s tempting to use a home equity line of credit to upgrade your kitchen or your bathrooms. However, try to avoid overextending yourself. Don’t place buying new furniture above paying your mortgage bill.

Buying Your First Home Can Build Long-Term Wealth

Protect your investment in your home and be careful about leveraging it to borrow money.

Ultimately, if you stay focused, make prompt payments, and maintain your home, you’ll be on your way to building long-term wealth through homeownership.


What is an Emergency Fund? Here’s What You Need to Know

I can’t tell you the number of times my emergency fund has saved me.

And my bank account.

There was that time my dog got sick and I ended up with thousands of dollars in vet bills. And the year when my trusty old Subaru went on the fritz. And let’s not forget the day I quit my job.

Okay, that last one might have been a choice.

Still, each of these situations could have been detrimental to my personal finances. Without an emergency fund, I would have been carless, thousands of dollars in credit card debt, and probably living in my parents’ basement because I couldn’t afford to pay rent.

But none of those happened. I was able to fix my car, pay for those vet bills in cash, and sustain myself long enough to find another source of income. All because I had emergency cash on hand.

The peace of mind from having an emergency fund kept me calm in the face of some serious financial stress. And it’s important that you have that peace of mind, too. So let’s talk about how you can build your emergency fund to get that same feeling.

Table of Contents

  • What is an Emergency Fund?
  • 3 Benefits of Having an Emergency Cash Fund
    • 1. It reduces your money-related stress.
    • 2. It protects you and your loved ones.
    • 3. It helps you escape the debt cycle.
  • Emergency Fund FAQs
    • How much emergency cash do I need?
    • Where should I keep my emergency savings?
    • When should I use my emergency fund (and when shouldn’t I)?
  • How to Build an Emergency Savings Fund
    • Make a budget.
    • Start small.
    • Prioritize your savings.
    • Cut expenses where you can.
    • Increase your income.
  • Don’t Wait to Start Your Emergency Fund

What is an Emergency Fund?

An emergency fund is a savings account set aside specifically for those “just in case” situations.

Just in case your car breaks down, or someone has to go to the emergency room. In case the heat pump stops working and you have to get it fixed. Your dryer quits drying and you need to replace it.

I like to think of it as a buffer against Murphy’s Law. If you’re not familiar, the concept of Murphy’s Law is that whatever can go wrong will go wrong.

We’ve all had those months where everything seems to break or needs repairing all at once. That’s Murphy’s Law in action.

With an emergency fund in place, you don’t have to stress out when Murphy makes an appearance. You can smile, wave, and approach him with confidence knowing everything is under control.

3 Benefits of Having an Emergency Cash Fund

There are numerous benefits, both financially and mentally, to having an emergency savings fund.

1. It reduces your money-related stress.

Studies show that money is one of the leading causes of stress in the U.S. A recent CNBC survey found that 30% of Americans are “constantly” stressed about money.

If you’ve ever faced a financial emergency — job loss, the heat going out in the middle of winter, last-minute travel to a family member’s funeral — then you can probably relate.

While these are never particularly joyous occasions, they are far less stressful when you have money set aside to deal with them.

2. It protects you and your loved ones.

Unexpected life events often leave us feeling financially vulnerable. However, when you’ve planned for them in advance, you can rest assured that you and the people you care about will be safe and taken care of.

3. It helps you escape the debt cycle.

When you’re getting out of debt, it can feel like no matter what you do, you can’t seem to get ahead. Just when things are going well, something pops up and you have to use your credit card, continuing the cycle of debt.

Your emergency fund helps break this cycle. When something unexpected happens, you can use your emergency fund to cover it, then rebuild your savings cushion before you go back to paying off debt.

Emergency Fund FAQs

As a financial coach, I field a lot of questions about saving and managing money. Here are the most common ones I get related to emergency funds.

How much emergency cash do I need?

This may surprise you, but you don’t necessarily need thousands and thousands of dollars in emergency cash set aside. The size of your emergency fund depends on your lifestyle, goals, and current circumstances (e.g. paying off debt, kids vs. no kids, own a home vs. rent, etc.).

If you’re single, rent a home, receive a steady full-time income, and are focusing on paying off your debt fast, then you can probably get by with an emergency savings of $1,000 to $1,500.

On the other hand, if you own a home, have kids, or rely on freelance work for the bulk of your income, you’ll want to aim for the $5,000 to $7,000 range, at a minimum.

Whatever your circumstances, aim for at least three months’ worth of basic living expenses — things like your rent or mortgage, utilities, food, and gas. If you have dependents or are self-employed, you should consider doubling that to a six-month emergency savings fund.

To better visualize what that may look like, try out the emergency fund calculator below.

The more you can stow away for a rainy day, the better prepared you’ll be when that day comes. Ultimately, a 12-month savings cushion should be the goal. However, don’t let that discourage you if it seems far away. Even a few hundred dollars can be a serious budget saver.

Start small, and increase your savings as you can

Although you’ll eventually want three to six months’ worth of expenses in your emergency fund, you need to start somewhere. Most of us can’t drop thousands of dollars into a savings account in the beginning. But most of us can aim to save $500-$1000 in a few months’ (or weeks’) time. Not only does this small amount allow you to handle most small-scale emergencies without incurring more debt, it allows you to continue the momentum of saving.

The last thing you want to do is pause your savings to pay off debt.

Where should I keep my emergency savings?

The point of having an emergency fund is to have cash available when you need it. Therefore, you’ll want to keep it in a place where you can access it quickly and easily.

However, you don’t want it to be too easy to access. Consider keeping your emergency fund in a separate bank from your other accounts. That way you’re less tempted to dip into your savings for non-emergency situations.

High-yield online savings accounts and money market accounts are good places to store your money for safekeeping. These accounts are federally insured up to $250,000 and allow you to earn interest on your savings.

When should I use my emergency fund (and when shouldn’t I)?

When deciding whether or not to dip into your emergency money, ask yourself these questions:

  1. Is it necessary?
  2. Does it need to happen now?
  3. Did I see this coming?

What’s necessary for someone else might not be for you. For example, if your car breaks down, but you could easily take public transportation to work and wherever else you need to, then you might not need to repair it right away. You could take a couple months to save up the money instead.

Here are some situations that would justify using your emergency savings:

  • Your pet gets sick and needs a $2,000 operation to live.
  • A family member passes away unexpectedly and you want to travel to the funeral.
  • Your car breaks down and you need it to get to work.
  • You get laid off from work.

Situations like these do NOT qualify for emergency fund access:

  • Gifts for holidays, birthdays, and other special occasions.
  • Expenses you can plan for (insurance, taxes, tires for your car, etc.).
  • A great deal on something you really want.
  • Spontaneous trips and vacations.

These types of expenses aren’t emergencies and should be worked into your normal monthly budget. Rather than relying on your emergency savings, use sinking funds to work them into your monthly budget. Save a little each month and by the time the expense rolls around, you have the money set aside to cover it.

How to Build an Emergency Savings Fund

Let’s state up front that there’s no wrong way to save money. However, there are a few steps you can take to build your emergency fund faster and without sacrificing your sanity.

Make a budget.

You can save money without one, but creating a budget will help you accomplish your goals much faster.

When you have an overall picture of your finances, you’ll be able to see how much money you can contribute to savings each month. From there, you can set a monthly savings goal and develop a timeline for when your emergency savings will be fully funded.

Start small.

This is advice I give to all my financial coaching clients. If you’re living paycheck to paycheck and feel like you don’t have any money left over at the end of the month, start with a few dollars when you can. You’ll be surprised how quickly $5 or $10 adds up.

Prioritize your savings.

You may have heard the term “pay yourself first.” The idea here is to treat savings as a necessary expense, just like rent or utilities. Make it a non-negotiable.

Every time you get paid, set aside a designated amount in your emergency fund. It doesn’t have to be much if the budget is tight right now. The most important thing is to get in the habit of saving first. Once you’ve set aside your savings, budget from what’s left.

Cut expenses where you can.

Cutting expenses doesn’t necessarily mean selling your house or canceling your Netflix subscription. Instead, look for quick wins in your budget where you could save some extra money. Subscriptions you don’t use, the “eating out” budget, and negotiating regular bills (cell phones, cable, etc.) are all quick and easy places to start.

Apps can help. Trim, for example, is a free tool that will track your spending and look for places in your budget where you can save money. It can also negotiate bills on your behalf, cancel unwanted subscriptions, and offer cash back when you shop. Learn more about the Trim app here.

Increase your income.

Last but not least, one of the best ways to build your emergency fund quickly is to look for an easy way to make more money. You could pick up a part-time job, work overtime at your current job (if that’s an option), start a side hustle, or sell a few things you don’t need.

Put all the money you make into savings (with the exception of taxes, of course) and you’ll reach your savings goal in no time.

Don’t Wait to Start Your Emergency Fund

Now that you know what an emergency fund is, what it can do for you, and how to set it up, it’s time to start saving. Don’t wait around because you think you don’t have enough to save now. Start small and increase your savings over time.

You can use apps to make saving, tracking your spending, and cutting expenses easier. Prioritize saving today. The next time life throws you a curveball or Murphy stops in for a visit, you’ll be glad you did.


Should You Pay Off Debt or Save Money? Here’s How to Decide

Our number one goal at DollarSprout is to help readers improve their financial lives, and we regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Here’s how we make money.

Debt is almost inescapable in America where, according to a Pew Charitable Trusts survey, around 80% of households reported they hold some form of debt.

From home mortgages to car loans and credit cards to student debt, there are times when borrowing money is necessary. Few people have the cash to pay for a home or college education. With so many Americans in debt, a major question arises: should you pay off debt or save?

Carrying debt can put a damper on the future, and the statistics about Americans’ futures look bleak lately. A 2017 GOBankingRates survey reported that 57% of American adults have less than $1,000 in savings, while 39% have no savings at all. Being in debt isn’t ideal, but obviously, neither is having no savings.

If you’re facing the question of whether to pay off debt or save, the answer isn’t a straightforward one. However, there are some good financial lessons you can apply to decide which is more important right now.

Table of Contents

  • Is it Better to Pay off Debt or Save Money? Two Approaches
    • 1. The Mathematical Approach to Debt Versus Savings
    • 2. The Emotional Approach to Debt Versus Savings
    • Do You Have to Choose to Either Pay Off Debt or Save?
  • How Do You Calculate Whether to Pay Off Debt or Save?
  • A Step-by-Step Plan for Debt Versus Savings
    • Step 1: Put Your Maximum Matched Savings into a 401(k)
    • Step 2: Build an Emergency Fund of Savings
    • Step 3: Focus on Paying Off Debt with High Interest Rates
    • Step 4: Decide Your Savings and Debt Priorities
    • Step 5: Stick to Your Spending Plan and Keep Building Your Savings
  • Pay Debt or Save Money? It’s a Personal Choice

Is it Better to Pay off Debt or Save Money? Two Approaches

There are two different approaches to handling whether to pay off debt or save money, but they don’t have to be mutually exclusive.

1. The Mathematical Approach to Debt Versus Savings

The mathematical answer to whether to pay off debt or save says that you should put your money wherever it will work hardest for you.

If you’re debating whether to pay down student loans or put excess cash into a retirement saving account, look at it this way: If the student loan interest rate is lower than the return rate from the retirement account, pay the minimum on the debt each month and put extra money into the retirement account.

Conversely, if you have high-interest debt that’s costing more than you could make on the returns from investing extra money, you should focus on paying off the debt before saving.

For example, say your only debt is a student loan with a 4% interest rate. If you can reasonably expect a 6% return from your retirement account, the mathematical solution would be to pay the minimum on your student loans and invest the rest. However, if you have a credit card balance with a 19% interest rate, it makes more sense numbers wise to work on paying off the high-interest debt.

If you need help comparing debt to savings, there are online calculators that can help determine which is a better priority for your excess income.

2. The Emotional Approach to Debt Versus Savings

Many people have a negative emotional reaction to being in debt. Therefore, when looking at whether to pay off debt or save, they decide to tackle debt first, even if the numbers don’t necessarily support that decision.

Focusing on paying off what you owe before saving creates greater peace of mind for some. The truth is, money is about far more than budgeting and simple math.

There is a great deal of emotion that impacts our everyday financial decisions. If that wasn’t the case, we’d all spend less than we make, no one would have debt, and there would be no money problems to speak of.


Do You Have to Choose to Either Pay Off Debt or Save?

When asking whether to pay off debt or save, is it necessary to choose one or the other? Of course not.

It’s possible to put part of your excess income toward paying down debt and another part of it toward saving for your future. That does, however, require that you have a fair amount of extra income.

Related: 74 Money Saving Tips You Can Use to Save Money Each Month

How Do You Calculate Whether to Pay Off Debt or Save?

Most of us believe our money should go where it has the biggest positive impact on our overall finances, and for that reason, you might be leaning towards the mathematical approach.

But if your debt is spread out across multiple loans, like a mortgage, a car loan, and student loans, and your investment opportunities are diverse with varying rates of return, the calculation becomes a little more complex than just comparing your interest rate on a loan to the interest you can earn from an investment account.

When you consider compound interest, things get even tougher to calculate. Certain accounts may not have the best return this year, but their potential to earn you money over time with compound interest is unmatched. You’ll lose that potential by not contributing to compounding accounts as early and as often as possible.

A Step-by-Step Plan for Debt Versus Savings

If you’re feeling a little lost right now, that’s okay. It’s because there’s not a definitive right or wrong answer to whether you should pay off debt or save. However, this step-by-step plan is what we would recommend for people who have debt but want to start saving for the future.

Step 1: Put Your Maximum Matched Savings into a 401(k)

If you have an employer who matches your 401(k) contributions, your first step is to put as much as they’re willing to match into that account every single month.

For example, if your employer matches up to 2%, then you get a 100% return on 2% of your salary. That’s free money for your future.

Even if your employer only offers a 50% match, a 50% return is better than any interest rate, however subprime your loans may be. There is nowhere your money will be more beneficial to you, so this is your first step.

Step 2: Build an Emergency Fund of Savings

If you’re wondering whether to pay off debt or tackle your emergency fund first, the answer is to build an emergency fund. The last thing you want is to have to turn to credit cards and take on more debt if you have some kind of emergency, like a medical bill, car repair, or home maintenance need.

The amount you’ll want to start with depends on your situation, like whether you own or rent a home, if you have children, and job security in your industry. The more financial responsibility you have, the more you’ll want to stash away just in case.

If you rent and are just starting your career, you can probably get by with a mini emergency fund of $1,500 to $3,000. If you own a home or have children, you should try to have three to six months worth of income in your emergency fund. That way, you can handle just about any emergency that comes your way, even losing your job.

Step 3: Focus on Paying Off Debt with High Interest Rates

Now that you’re contributing to your 401(k) and have a small emergency fund, turn your attention (and excess income) toward your debt. Any debt you have with subprime interest rates, or rates higher than 9%, is first to go.

Interest rates this high will likely cost you more money than you would make on most investments. Paying these debts off as soon as possible means you’ll pay less in interest.

If you have high interest debt and know that it’s going to take you a while to pay it all off, you may want to consider refinancing with a personal loan. The idea here is to replace a high interest debt (like credit card debt) with a lower interest rate loan. For instance, if you are paying 24% APR on a credit and you take out a personal loan at 12% APR — and immediately use your loan proceeds to pay off your credit card debt — you’ll be left with a more manageable debt to pay off. In this example, 12% still isn’t ideal, but it’s a lot better than 24%!

Related: How to Get Out of Debt (A Step-by-Step Guide)

Step 4: Decide Your Savings and Debt Priorities

At this point, your finances are in pretty good shape. You have an emergency fund and you’ve wiped out any high-interest debt. Should you pay off debt or save more at this point? It’s up to you now.

If your debt interest rate is below the average rate of return for the stock market — roughly 7% — then it probably makes more mathematical sense to invest your money. Interest rates above the 10% mark are considered high-interest debts and will probably be worth it to pay off before you start investing.

Having some low-interest debt remaining isn’t necessarily a bad thing. You can start working on that next, or if you have other financial priorities, start working toward those. It all depends on your debt tolerance and financial priorities.

Maybe you’ve been wondering whether to pay off debt or save for a house down payment. If buying a home is one of your goals and you’ve paid off your high-interest debt, it might be time to start saving toward your down payment. On the other hand, if getting out of debt completely is your top priority, you could keep throwing your extra income towards your remaining debts.

Step 5: Stick to Your Spending Plan and Keep Building Your Savings

The beauty of personal finance is that’s it’s just that — personal. You don’t have to dedicate all your extra income to paying off your debt or saving. You can do both.

Keep working toward being debt free, and keep contributing to your retirement savings, too. With the financial foundation you’ve built, you should be able to pay down your remaining debt while continuing to plan for the future.

Related: How to Track Expenses in 3 Easy Steps (And Never Fail at Budgeting Again)

Pay Debt or Save Money? It’s a Personal Choice

At the end of the day, the decision to pay off debt or save is a choice each individual has to make for themselves. Every situation is different. For some, it may make more mathematical sense to put the minimum payment towards debt and any remaining income towards investing. However, the desire to be debt free may sway them to do the opposite.

The key takeaway is to figure out what makes mathematical sense for your situation as well as what aligns with your saving goals and values. From there, you can make an informed decision and create a plan that inspires you to take action.


How to Get Out of Debt: A Step-by-Step Guide for 2020

ur number one goal at DollarSprout is to help readers improve their financial lives, and we regularly partner with companies that share that same vision. Some of the links in this post may be from our partners. Here’s how we make money.

We all know the basic principles of how to get out of debt.

Whether you’re broke and have no money, a low income or bad credit, the steps are all the same.

Spend less than you make and put any extra cash towards paying off your debt.

In practice, though, organizing what you need to tackle first, and knowing how to get started, can be overwhelming.

It can leave you feeling trapped and prevent you from getting started altogether.

To help you on your way to financial freedom, we’ve put together this simple, step-by-step guide to help you build a debt payoff plan and eliminate your debt.

It doesn’t matter if you have no money or your income is low. Even with bad credit, you can still put this step-by-step debt payoff guide to good use.

Let’s walk through the steps and help you get out of debt once and for all.

Table of Contents

  • Step 1: Find Out How Much Debt You Owe
  • Step 2: Choose Your Approach: Debt Snowball vs. Debt Avalanche
    • Debt Snowball Method
    • Debt Avalanche Method
    • Decide Which Debt You Will Tackle First
  • Step 3: Make Some Big Changes
    • Get Rid of Your Credit Cards
    • Sell Your Car
    • Stop Investing (For Now)
    • Cut Cable
    • Sell Your Unused Stuff
  • Step 4: Create a Monthly Budget
    • How to Make a Budget
    • Use Trim to Lower Your Monthly Bills
  • Step 5: Lower Your Interest Rates to Save Money
    • Refinance Your Student Loans
    • Negotiate Your Credit Card Interest Rates (or Consolidate)
    • Consider a Balance Transfer Credit Card
  • Step 6: Improve Your Spending Habits
    • Save Money on Food Each Month
    • Learn How to Say “No”
    • Give Up Your Expensive Hobbies
  • Step 7: Increase Your Income
    • Ask for a Raise
    • Start a Side Hustle
    • Start a Low-Overhead Online Business
  • Putting it All Together

Step 1: Find Out How Much Debt You Owe

You can’t develop a debt payment strategy until you know exactly what you’re up against.

It’s time to mentally gather up all your debts – from that $40 store credit card balance to your $30,000 car loan – and put it all in one place.

Write down the debts you have, how much you owe on each, the interest rate, and the minimum payment.

If you aren’t sure on the interest rate, take the time to open your accounts and find the exact number. High-interest rate debt is a bigger drag on your success than low-interest debt, so you need to know which is which.

Totaling it all up in black-and-white may be scary, but you’re getting ready to cut that number down! Promise yourself that is the highest your debt number will ever be.

Now, let’s get to work.

Step 2: Choose Your Approach: Debt Snowball vs. Debt Avalanche

Once know exactly how much you owe, it’s time to put a plan together for how you’re going to get out of debt.

Throwing money at a different debt every month, without tracking your progress, is a surefire way for burnout. You’ll feel like you’re spinning your wheels and give up too soon.

The best way to pay down debt is to focus on one piece of debt at a time, until that one debt is entirely paid off. In the meantime, make only minimum payments on the other debts.Click to Tweet

This gives you milestones to celebrate, motivates you to keep going, and keeps you organized along the way.

So the question is, how do you decide which debt to pay off first?

There are two main philosophies when it comes to making this choice, the “Debt Snowball Method” and the “Debt Avalanche Method.”

Debt Snowball Method

In a nutshell: Prioritize your debts from smallest to largest, ignoring interest rates.

Remember making snowmen as a kid? You would start with a small snowball, then roll it along the ground, picking up more snow until you had a massive snowman belly. That’s the concept behind the debt snowball.

With the debt snowball, you start by paying off your debt with the smallest balance, regardless of interest rate.

While you pay off that debt, you make minimum payments on all the others.

Why is it called the debt snowball? Because the amount you put towards principle (your balance) snowballs every month. You keep putting the same amount of money towards your debts, even as you pay each one off, increasing the amount that goes towards principal over interest.

Debt Avalanche Method

In a nutshell: Prioritize your debts from highest interest rate to lowest, ignoring size.

The methodology of the debt avalanche is similar to the debt snowball, except with this method your goal is to minimize interest costs. No extra profits for those greedy creditors from you!

With the debt avalanche, you start by paying off the debt with the highest interest rate, regardless of size.

Then move on to the debt with the next highest interest rate.

Why an avalanche instead of a snowball? Because, by eliminating high-interest costs first, you put more of your cash towards actual principal over time. This means getting out of debt somewhat faster (and cheaper).

Decide Which Debt You Will Tackle First

What’s more important to you? Getting quick, early wins by paying off small debts, or paying the least amount of interest?

Both the snowball and avalanche methods have their benefits. And while the debt snowball isn’t mathematically the cheapest way out of debt, it is one of the most effective. Pursuing a debt-free life can be a long process, depending on where you are starting, and paying off a few debts early on can really get you excited to keep going.

ACTION ITEM: Choose whichever method sounds best for you, then organize your debts in that order. You’re ready to start making payments.

Step 3: Make Some Big Changes

While small, day-to-day changes matter, a few big changes can fast track you to getting out of debt. Consider these ideas and decide whether the expense they represent is truly worth it to you.

Get Rid of Your Credit Cards

Are credit cards burning a hole in your pocket? It may be time to cut them up.

If credit card debt is part of your problem, sticking to cash and debit cards can help you reset your spending mindset. Nothing is more discouraging when you’re paying off debt than realizing you increased it accidentally with an impulse credit card purchase.

Once you are officially debt free, and used to spending less than you make each and every month, you can revisit the issue. In the meantime, credit card rewards don’t offset interest charges.

Sell Your Car

Have a hefty car payment? Consider selling your car for a cheaper used model to eliminate the debt and reduce your insurance costs.

Look for good used car deals outside of new car dealerships. You’ll have more room to haggle with private sales and at independent used car dealers. Just be sure you have a good mechanic look over the car before you buy.

Don’t have a car payment? Decide whether your family can get by with one car instead of two. Dropping your spouse off at work in the morning might feel like a hassle, but if that extra 15 minutes saves you $500 a month, it might be worth it.

Stop Investing (For Now)

Saving for the future is essential, but when you have expensive debt that is holding you back, you need to set your priorities. Pulling back on investing in the short-term can put you in a better position to invest adequately in the future. View each dollar you save in interest cost as a dollar wisely invested.

Note: We would never recommend cutting your 401(k) contributions to a point where you don’t receive your full employer match. That’s free money, and the instant return is more than worth whatever you are paying in interest.

Cut Cable

It’s 2020. You can watch most of your favorite shows online, and even notable sporting events are offering free streaming options.

We watched the Super Bowl last year via Amazon Prime.

If you haven’t cut the cord yet, it’s time! Traditional cable packages run over $100 a month and can be a major drag on your goals.

Sell Your Unused Stuff

We could all do with a bit of minimizing. But instead of heading to the dumpster with your kids’ old toys and that ice bucket Aunt Marge sent you, list them for sale on Decluttr, letgo, or Craigslist.

On average, people have over $1,000 worth of stuff in their house that they don’t use. When we went through our minimizing process, we sold over $1,200 of books, toys, extra kitchen gear, and more.

The fringe benefit of this exercise? You realize how many things you’ve paid good money for that you didn’t really need. That tough reality makes it easier to say no to spending in the future.

Step 4: Create a Monthly Budget

Want to know how much you can put towards debt each month? You’re going to need a budget.

A reasonable budget helps you understand where your money is going. It alerts you to where cash is leaking out to things that don’t really matter to you. And it clues you in on how much you can afford for the things you do want.

By building a budget thoughtfully and allowing yourself some flexibility, you can reduce money stress by knowing there is always money in the bank for the things you need.

How to Make a Budget

Before you dive in, remember one thing:  the budget you create today is not set in stone.

Your categories, spending, and habits will change over the first few months. And that is perfectly fine! It will take time to adjust to tracking your expenses and creating awareness of your needs.

1. Figure out how much money you make.

Look up exactly how much you get paid each pay period. This is what you have to work with.

2. Define your core expenses.

Housing, utilities, groceries, insurance – These are the nonnegotiable expenses and must be covered first.

3. Write out your debt payments.

For now, assume you only make minimum payments on all of your debts since that is the amount required.

4. Create categories for regular expenses and assign reasonable spending limits to each item.

Don’t be afraid to have many budget categories. It will help you have a greater understanding of where things are going. Some regular expenses include internet, cell phone, household goods, medical costs, pets, haircuts, car repair, and home repair. Not every item will have an expense every month, but by setting some money aside for those irregular expenses, you’ll be ready when they hit.

5. Allocate remaining money between debt paydown and quality of life expenses.

The money that is left over from your income after completing steps 2 through 4 is what you have to contribute towards your goals and fun. In addition to debt paydown, you may want to allow for dinners out, gym memberships, gifts, etc. Divide the money in the way that best works for you.

Tip: While you may want to run at your goals full speed, always have some pocket money budgeted. Even if it only covers one Starbucks coffee a month, those little treats will keep you sane.

If you have very little money left over after Step 4, you may need to review your core and regular expenses. Without big lifestyle changes you may be stuck treading water, finding it difficult to ever fully get out of debt.

As you get accustomed to your budget, don’t be afraid to shift money from one category to another. There is no such thing as a normal month. Don’t go on a spending splurge and completely fall off the tracks just because you didn’t accurately predict the cost of a house repair.

Use Trim to Lower Your Monthly Bills

Want to cut your bills without ever having to talk to a company ever again? Trim has your back.

Trim is one of our favorite money-saving tools. The free app sends you updates on your spending via text, finds unwanted subscriptions and cancels them for you, and can also negotiate your cable or internet bill (seriously).

Step 5: Lower Your Interest Rates to Save Money

The less interest you can pay to your creditors, the faster you’ll be able to escape your debt. Check out these top ways to lower your interest rates.

Refinance Your Student Loans

Student loans dragging you down? You may be able to refinance to a lower rate and shorter term.

Reducing the term of your loans, even with a lower interest rate, will likely increase your current monthly payment. But with fewer years of payments to handle, you can save a bundle over time. SoFi, a top student loan refinancing provider, offers one such service. With no prepayment penalties and no hidden fees, it’s an easy way to save thousands of dollars in interest payments over the life of your loan.

Negotiate Your Credit Card Interest Rates (or Consolidate)

Credit card interest rates aren’t set in stone. It is a competitive market out there for credit card companies, which means they have to be flexible to keep customers.

If you’re a long-time customer and in good standing, it doesn’t hurt to call and ask for a reduction in interest rates. More often than not, they will be willing to make a cut to keep you as a customer.

Things to mention to get them on your side? Let them know how long you’ve been a loyal customer and that you would love to stick around. But, also share that other credit card companies are offering you lower rates, even 0% introductory rates for balance transfers, and that you can’t ignore the interest savings. Usually, they swing into customer retention mode, and they may be able to pull some strings.

If that’s not an option, consider a debt consolidation loan. If the average APR on your cards is 24% and you take out a personal loan at 12% APR — and immediately pay off your credit card debt — you’ll be left with a more manageable debt to pay off. It won’t solve your debt issue completely, but there is a time and place where debt consolidation makes sense. To see what rates you might be able to get, check out our loan comparison page.

Consider a Balance Transfer Credit Card

Can’t sufficiently lower your interest rate? Consider a balance transfer, which lets you move debt from one credit card to a different card with a lower rate – sometimes even 0%.

Effectively, you are paying off one credit card with another. But if the rate difference is wide enough, it could save you money. Just make sure you get all the details before starting a transfer. Many balance transfer cards charge a transfer fee of 3% to 5%. And they may have limits on how much you can transfer.

While 0% interest sounds fantastic, only undertake a balance transfer if you are serious about paying down debt. Make sure you can pay off the balance during the 0% offer period. Otherwise, you’re just playing hot potato with your balance.

Step 6: Improve Your Spending Habits

Embracing a frugal mindset will reduce your spending and allow you to pursue your goals more effectively. Not sure where to cut? Start with the big stuff.

Save Money on Food Each Month

The average Americanspends 10% of their budget on food, one of the most significant categories after housing. We have to eat, but do we have to pay so much doing it? Here’s how you can cut.

Stop Eating Out

Not only is eating at a restaurant more expensive, but it is also harder on your waistline. Meals at restaurants cost more and include larger portion sizes and more fat than the average dinner cooked at home.

Over 4% of the American budget (so 40% of total food spending) goes to food away from home. Eliminate dining out from your budget, at least until you are debt-free.

Avoid Impulse Buys in the Grocery Store

Before heading to your weekly grocery store shop, take the time to make a list. Check your grocery store’s online circular and take a look at Ibotta, a free app that gives you cash rebates on grocery store purchases, to see what’s on sale. Then, build a meal plan and list around those items.

Once you’re in the grocery store, stick to your list! To avoid extra purchases motivated by hunger, have a snack before heading to the store.

Learn How to Say “No”

Nights out on the town, drinks with coworkers, and shopping trips with friends are tempting. But when it doesn’t fit in your budget, you’re sacrificing your future for a little fun today.

Don’t be afraid to say “no” to any event you can’t afford. You don’t have to isolate yourself in your debt-free journey, just be willing to offer an alternative. Suggesting a game night or potluck at your place could mean more quality time with your friends for a lot less money.

Give Up Your Expensive Hobbies

Spending $100 a month on yoga classes just isn’t realistic when you’re hustling to get out of debt. Trade in your expensive hobbies for lower cost options like free YouTube classes or a monthly book club.

Step 7: Increase Your Income

Frugal living is powerful, but it has a limit. You can’t save more than you make. So, to take your debt-free journey to the next level, it’s time to bring in some more dough.

Ask for a Raise

If you’ve been working hard and providing value to your company, it never hurts to ask for a raise.

Don’t just drop the request in your manager’s lap though. Ask for feedback, develop your skills and take on more responsibility. Along the way, proactively let your superiors know what you’ve accomplished. You want your manager to know you deserve a raise before you even walk through the door!

Start a Side Hustle

Commit a few spare hours in your week to something you’re good at, or a task you enjoy, that can be monetized online. Since the average person watches five hours of TV a day, I’m willing to bet you can make the time.

Related: 40 Legit Ways to Make Money

Start a Low-Overhead Online Business

The internet has made it easier than ever to start an online business with close to zero up-front costs.

Set up shop as a freelance writer, proofreader, or virtual assistant, and offer your services to other companies who want outside help with hiring a permanent employee. You can work as many or as few hours as you want, with some people turning their businesses into six-figure full-time jobs.

Get your first clients by reaching out to local businesses, posting about your new business on Facebook and LinkedIn, or listing your services on Upwork.

Putting it All Together

Whether you’re broke and have no money, you’re living on a low income or you have bad credit, just stick to these steps to become debt free once and for all.

Once you have an action plan for how to get out of debt, achieving debt freedom just requires time. Stay focused on your goal, stick to a budget, trim fat from your spending, and find ways to bring in more income to speed up your journey. Just don’t forget to celebrate all the little wins along the way!

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