Episode: 368 - How Kati Paid Off $236K Debt and Saved $89K on a Single Income
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When you're focused on getting out of debt, do you worry about building your savings and retirement? Balancing savings and paying off debt can feel like trying to pat your head and rub your stomach at the same time. It's doable, but it's going to take some coordination. Before I ever started paying off debt, I felt like I had gotten a very late start to investing for my retirement.
We all have different approaches to this topic, so I wanted to share my personal journey with you today.
Starting with Savings
I consulted a financial advisor and opened a Roth IRA account. She reminded me that starting to save anything is better than nothing at all. So, I began by putting in $50 a month, and over time, these small investments started to grow thanks to compound interest. Even when I paused contributions due to strained finances, the account continued to grow unaided, illustrating the power of interest working in your favor.
The Role of Employer Contributions
At my current job, I have the option to contribute to my 401k from each paycheck, with the company matching up to a certain percentage. That is free money I was not going to leave on the table, so I made sure to maximize those contributions. Over time, this small but steady investment grew significantly, proving that even modest contributions can accrue over time.
Learning from Family Experiences
My dad's journey has been particularly instructive. He faced a major career change that involved taking a severance package and opening a hardware store. Despite the eventual need to close the store, the experience didn't impact their retirement fund directly. However, the lack of contributions during that period had a tangible effect later. Observing this, I realized the importance of consistent contributions to retirement accounts.
Steps to Improve Financial Health
Here are some steps that have helped me balance saving and debt repayment:
Build an Emergency Fund: Start with a goal of $500 to $1,000 to protect against unexpected expenses, preventing new debt.
Focus on Paying Down Debt: Concentrate on your lowest balance debt first, making minimum payments on others to build momentum.
Automate Your Savings: Even small automatic transfers to savings after payday can build wealth and foster good habits.
Use Windfalls Wisely: Allocate 80% of any bonuses or extra income to debt and 20% to savings.
Cut Quiet Spending Leaks: Audit subscriptions and impulse spending, redirecting funds to debts or savings.
Separate Short-Term and Long-Term Savings: Use high-yield accounts for emergency and long-term savings to take advantage of higher interest rates and reduce temptation to spend.
Resist an All-or-Nothing Mindset: Saving while paying off debt prevents stagnation and maintains stress reduction and motivation.
Every little bit helps on the path to financial stability, and finding a balance between debt repayment and saving is within reach. Adopting these practices has placed me in a better position by reducing debt and planning for a financially secure future.
Resources:
The Totally Awesome Debt Freedom Planner https://www.debtfreedad.com/planner
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Transcript:
Kati:
When you're focused on getting out of debt, do you worry about building your savings and retirement? Balancing savings and paying off debt can feel like trying to pat your head and rub your stomach at the same time. It's doable, but it's going to take some coordination. Before I ever started paying off debt, I already felt like I had gotten a very late and very small start to investing for my retirement. We all have different approaches to this topic, so I wanted to share my personal journey with you today.
Announcer:
You're listening to the Debt Free Dad podcast with Brad Nelson. Brad and his co-hosts experience the anxiety of living paycheck to paycheck before learning the fundamentals of financial success. They are now on a mission to empower regular people to pay off their debt for good and enjoy happier, less stressful lives. Keep listening for inspirational interviews, tips, tricks, and practical advice to gain financial freedom.
Kati:
I'm Katie, your host for today's episode, and I've been on my journey to debt freedom for just over seven years now. And in that time, I've paid off over $236,446 in student loans, car loans, medical bills, and credit card debt, all on a single income. Now, along with that mind-boggling number, in the same last seven years, I have surprisingly not added up all the money that I was also consistently plugging into my emergency funds, retirement plans, and health savings account or HSA. When I did the math, I was shocked to realize that I have saved or invested over $89,500. And I didn't even start saving a single penny for retirement until I was 30 years old. I was running my own business and barely paying myself, let alone having much of a savings account. But I consulted a financial advisor and opened a Roth IRA account. She said, or she reminded me, that starting to save anything is better than nothing at all, just like we say about paying off debt. So I started putting in $50 a month. And after about eight years of investments, I had just under $6,000 in my account. Not enough to retire, but it was something. After starting the debt-free dads program, Roots of Personal Finance, I started to budget and review where my money was going. And at that time, I felt like my finances were stretched so thin that I stopped making contributions to my Roth IRA and just let the funds continue to grow simply with the interest and investments I had already made. Today, that account is just shy of $19,000. So that proves that compound interest can really add up, which is great when it's working in your favor. Now, in the meantime, at my current job, I have the option to contribute to my 401k from each paycheck, and the company will match up to a certain percentage. That is free money that I was not going to leave on the table. Again, it was a small but steady amount being invested, but it slowly grew over time. And I've continued to contribute to my 401k to maximize that matching employer contribution. And it's grown to almost $75,000. Now I'm only 45, but what's got me thinking a lot more about retirement lately? Well, my dad retires at the end of this year. He's got a countdown on his phone that can tell you the weeks, days, or even minutes until retirement. Not that anyone's counting. Both of my parents have pretty much always worked full-time for my entire life. Back in the early 2000s, my dad's corporate job ended up having another company come in, bought them out, and closing the local offices. So my dad was offered either a severance package or he'd have to relocate to Manhattan to keep his job. He took the severance package and ended up opening a hardware store in a very rural county. I called this his midlife crisis, but honestly, it's probably the happiest he's been since he was a boy growing up on the farm. As you may remember, 2008, 2009, the economy took an unfortunate downturn. And their rural county took a big hit. When a grocery store closes, then a church, and then a bar, you know it's dire. My dad ended up having to close the hardware store, and they moved out of the apartment above that store. And dad found another job. Now, while my parents didn't take any money out of their retirement fund during their time in the hardware store, they also weren't contributing to that account for almost a decade. They're feeling that impact now and tightening up their finances for retirement. And they've made some great moves. I'm so proud of them. They've paid off their cars, they're paying down a lot of their mortgage, and they're not taking on new debt. But I have taken note and realized that with all the debt I have paid off, and even though I have another 20 years to go until retirement, I have the funds to start contributing to my Roth IRA fund again. And doing that will make a huge impact on my final retirement numbers. But I'm also putting myself in a much better position simply by not having all that debt dragging me down anymore. So let's break it down with some steps that might help you. Number one, build an emergency fund first. We're starting with a goal of $500 to $1,000 to start. This protects you from putting new emergencies on a credit card and undoing your progress. I swear this is the most important tip that I thought was impossible until I did it myself. And then I'm like, okay, all right, maybe I can do this. Number two, focus on paying down debt to free up your finances. So if you pay extra on your debt with the lowest balance, especially credit cards or payday loans, while you're making minimum payments on your other debts, this will help you keep that momentum and progress. Once you've paid off that smallest balance, you're gonna snowball all that money you were paying towards it and start hitting the next lowest debt balance. Number three, automate your savings, even if it's small amounts. Set up an automatic transfer to savings right after payday. Whether it's $10 or 10% of your paycheck, it will grow over time and keep you in a good habit. Number four, use windfalls wisely, tax refunds, bonuses, side hustle income. Put at least 80% of those big numbers toward debt and keep 20% in savings until you're in a stronger spot. Number five, cut those quiet leaks in your spending, audit your monthly subscriptions, cancel unused memberships, and try to cut down on those impulse purchases, redirect that money to savings or your debt payoff. And number six, keep short-term savings goals separate from long-term. Use a high yield in savings account for your emergency fund or long-term savings with decent interest. And many online banks are currently offering about 5%. This keeps that money slightly out of reach and a little less of a temptation to spend. Finally, number seven, resist all or nothing mindset. That's a trap. If you're saving something while paying off your debt, that keeps you from feeling like you're standing still financially. Even a small savings balance can reduce stress and keep motivation high. Remember, every little bit helps, whether you've paid off your debt or you're still on your journey to debt freedom. It's all going to have a positive impact in the long run. So until next time, thanks for joining us at the Debt Free Dad podcast.
Brad Nelson:
Now listen, if you're ready to break free from living paycheck to paycheck, which if you're listening, I hope you are. You want to reduce financial stress, you want to build savings, you want to finally pay off debt for good, but you're not sure where to get started. Don't worry. We've got you covered here at debt free dad. Simplify my money is sent each Sunday to your email. We make it easy. And Simplify My Money, it's your step-by-step roadmap to better financial control. And you're also going to learn easy to follow strategies to manage your money effectively. You're going to get stress-free money decisions that will help you simplify your financial life with proven tips that actually work. You're also going to gain the tools and the confidence to tackle your financial goals head on. You can sign up for Simplify My Money by clicking the link at the top of the show notes.
Announcer:
Thanks for listening to the Debt Free Dad podcast. Connect with us on Facebook, TikTok, YouTube, and Instagram. Just search Debt Free Dad. If you found value in today's episode, please leave us a rating and review. We so appreciate it. For resources, show notes, and links mentioned in today's show, visit debtfreedad.com. Catch you next week.
