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5 Ways to Get Out of Debt While Growing Your Savings Account

03/21/2013 12:53 pm ET | Updated Oct 30, 2013
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It's the question that seems to have no answer: What to do first? Pay off that debt or start saving? It's very possible to do both, but it will take some strict and creative budgeting along with a solid commitment to doing so. It might seem counterintuitive to contribute to a retirement fund when there are high-interest debts to be paid. However, having a safety net is important and financial management is all about priority -- not prisoner takes all.

When people are facing debt and limited or no savings, it can be difficult to figure out where to start. Debt is stressful, both financially and emotionally, and it's important to stay on top of it. However, it's also important to have a retirement account and emergency funds just in case. Here are five ways to climb out of debt with little savings to boot.

#1. Create a Budget

This doesn't mean aiming to spend less at the grocery store or switching to a generic brand of detergent. Every financial plan has to start with a budget that's carefully thought through and written down. No matter how a person gets paid, whether it's bi-monthly or with regular freelance work, almost everyone has a good idea of how much money will be coming in. Account for every single penny. A good rule of thumb is to shave down as many unnecessary expenses as possible by buying only what you really need and aim for 80 percent debt payments and 20 percent savings with the remaining funds.

#2. Consolidate and Get Credit Counseling

Many debts can be consolidated into lower payments, such as student loan debt. However, just make sure that consolidation doesn't lead to higher interest rates or unmanageable payments in the long run. Along the same thread, there are non-profit debt consolidation companies that can negotiate lower interest payments for clients. It might even be possible to get 0 percent APR when handing debt over to a credit counselor, but credit will be locked and payments automated until the debt is paid off entirely.

#3. Automate Payments

Most people accept that about 20 percent of their income automatically goes to taxes. The same thought process can be achieved with paying off debts and savings. If possible, automate a certain percentage of each paycheck to go towards a savings or retirement account. Open a new, free checking account that's solely for paying off debts and automate a percentage of each paycheck to this account. It makes debt payments and saving seem effortless and painless. You can get more information about it by clicking here.

#4. Make an Effort to Save Every Day

Most people overpay and overspend on things that they wouldn't even miss. For example, it's often much more affordable (not to mention healthier) to shop seasonally for foods at a farmers' market than a grocery store. It's more affordable to get staples like shampoo at a discount store rather than the convenient high-end store with a great atmosphere. Is it worth it to pay double or triple for the same item? Probably not.

#5. Set Mini Goals and Rewards

Getting into the habit of paying off debt (and not just the minimum balance) and saving can be difficult, especially when someone is used to indulging in luxury items. That's why mini goals and rewards are so important. When a certain small goal is reached, such as paying off half of a debt, have a reward in sight. This reward can even be somewhat dependent on money, such as a night at a favorite restaurant, since savings have also been put aside for special events.

Too much of anything isn't good. This includes putting all the eggs into one basket by paying off debt at the expense of savings or vice versa. Instead, tackle financial management from all angles. No matter what the situation, it's possible to get on track. Don't be afraid to ask for help from a credit counselor or financial adviser -- just as long as the services are free, of course.