When Both Net Worth and Debt Increase
You’re killing it at your savings goals…. but at the same time, your debt keeps increasing. What does it mean when your savings/net worth and your debt levels both increase every month? You’re meticulously and automatically funneling your money to fund your early retirement, home ownership, or other ultra cool dream. Every month your net worst is increasing, providing you with a warm and fuzzy feeling when you see your numbers soar to higher levels. However, on the flip side, you know (but maybe are ignoring) that your debt levels are increasing every month too.
What’s going on? Are you doing well, or aren’t you? And how can you deal with the debt monster without changing your saving levels?
Your Spending Isn’t the Problem
You can breath a sigh of relief, because the problem isn’t your spending. If you’re saving enough to increase your net worth every month, you are doing well. What the consistent net worth gains mean is that every month, you are squirreling away more money than you are spending. That’s the hardest part of growing your stash, so pay yourself on the back.
Then why is debt going up too?
You’re Ignoring Real Expenses
Here’s what’s happening. You have a budget which you are more or less following. The budget balances in the best case scenario- no emergencies, no miscellaneous expenses here and there. However, reality is not reflecting your budget. While you’re hitting all of your savings goals, your money to spend on bills and expenses is more in scarcity mode. Your over ambitious savings plan is chocking out your day to day spending. So you’re going into debt to make ends meet. This is resulting in a feast for your savings goals, but a famine for your everyday expenses.
Check your spending, line by line, on Mint or another financial tracking app. Is your food monthly spending going over your budget? How about travel? Look at each category to figure out what is not fitting your budget. Then update your budget to reflect the reality. If you’re already an uber saver, maybe cut yourself a little slack to live day to day in comfort.
Slay the Debt Monster
Once your budget is fixed, within a few months you’ll be chugging away without increasing debt. Let’s now deal with this debt monster head on, because paying off loans should always be your first priority before saving. Here are my suggestions to slay the debt monster:
Temporarily Stop Saving for your Most Important Goal
Just like, when paying off debt, paying your smallest balance a psychological boost, when diverting money from your savings goal to pay off debt, halting your most important goal is going to hurt so hard, it’ll motivate you to pay even faster. Temporarily move the money from your top savings goal to paying off debt.
For me, it’s paying off my condo mortgage, since that is the pillar to my early retirement income plan. I have cancelled my monthly prepayments of $500 and will be using it to pay off my debt. Once I’m done, I will start paying off my condo mortgage again.
Save an Extra $10 a Day
Disclaimer: this strategy is a bit insane and not for the weak. From the day you get paid, save an extra $10 every work day, until you run out of money. Say what? If you normally buy a soup and drink for lunch, you’re drinking tap water and getting a cheap bagel with butter instead. If you need to restock something, either do without or wait as long as you possibly can to replace the item. We’re in debt repayment mode, baby.
That $10 a day will go to your debt, on top of other money you are sending there. When you run out of money, you don’t buy anything else. It’s challenging, but it works. I paid off the last couple of thousand on my line of credit in this way.
Now, Create Emergency Savings
How do you prevent this situation from reoccurring? Save an emergency fund, at least one month’s wage. This will be your buffer to protect against any future budget deviance. You probably didn’t have this saved before, right? This is what got you into this mess, but emergency savings will prevent this from happening again.
It can be alarming when you have a high level of savings and your debt levels are soaring. Make sure you face this problem head on, because the longer you ignore it, the more it will compound. What strategies will you use to pay down your debt this year?