Summer Savings: Relieve Financial Stress by Reducing Debt and Saving for the Unexpected

By Theresa Cagle Fry, Senior Vice President and Manager of IRAs, Retirement & Education Planning

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What does summer bring to mind for you? For me, summer evokes thoughts of warm weather, trips with family, pets, friends, grilling, swimming, and the goal of relaxation. If you are feeling overdue for a little more relaxation and a little less stress, you are not alone. There have been lasting emotional and financial impacts from COVID-19. But even before the pandemic, a FINRA Investor Education Foundation study[i] found Americans were already experiencing financial anxiety:

  • 60% of respondents indicated feeling anxious when thinking about their personal finances, and 50% of respondents indicated feeling stressed when discussing their finances.
  • One of the three main factors driving financial anxiety and stress is debt. Credit card and student loan debt were particularly mentioned as major sources of anxiety.

As we enter summer and the season of relaxation, we will be featuring a number of “Summer Savings Strategies” to help you feel better financially, whether you are preparing for or living in retirement, just getting started on your financial independence, saving for a loved one’s future education expenses, or looking for ways to save more tax efficiently.

Let’s start with addressing one of the primary causes of financial anxiety mentioned in the study – debt. It’s important to understand how to manage the amount of debt you have, and also the interest rate you are paying on your debt each year. The average American will pay over $279,000 in interest on credit purchases over the course of their life.[i]  That’s a big number!

Using a credit card is easy, but the debt you accumulate can quickly become overwhelming. If you are afraid your credit cards, student loans, or car payments are getting the best of you, here are three simple steps to reduce your stress:

  1. Create a budget. Start with a budget so you know the amount of income you have coming in and the amount of spending going out each month. When you can, limit your spending to cash.
  2. Plan ahead. Make sure your budget includes establishing an emergency fund for bigger costs like a child needing braces, unexpected medical costs, car repairs, or for a new cell phone when you accidentally break yours. This will allow you to pay cash for unexpected expenses instead of putting them on a credit card. You can build your emergency fund over time by allocating a set amount out of each paycheck with the goal of saving and maintaining an amount equal to 3 – 6 months of your salary. Consider including in your budget some long-term savings goals, such as starting contributions to your workplace retirement plan or increasing them each time you receive a raise.
  3. Manage payments. Too many credit card users make only the minimum payment, creating a cycle of debt that is difficult to break. Look carefully at your credit card statement. By law, your credit card company is required to include a “Minimum Payment Warning,” which discloses how long it would take to pay off your current debt if you paid only the minimum each month. If you have more than one source of debt, such as credit card debt and student loan debt, develop a plan to pay down your highest interest rate debt first. In addition, make sure you make your payments on time. Using features like autopay when it is available is a convenient way to avoid late payment penalties. Late payments on your loans or credit cards will just put you deeper in debt and cause your credit score to drop. A lower credit score typically means you pay higher interest rates, which creates another cycle that is difficult to break.

Reducing debt and saving for the unexpected has many benefits, and knowing you have a plan in place to deal with the sources of your financial stress is where financial planning can help. If you would like help developing or reviewing your budget, or developing a financial plan for your future, contact your financial advisor.

 

[i]   Calculate Your Lifetime Cost of Debt | Credit.com

[i] Anxiety-and-Stress-Report-GFLEC-FINRA-FINAL.pdf