Debt Management Basics

Take Control and Stop the Cycle of Debt

February 2012

The goal of every debt management plan ought to be to eventually stop paying so much interest and actually start earning it instead. It may sound like an unreachable dream, but with some basic debt management techniques and a solid debt management plan, you can achieve it.

For starters, the reason a lot of people have difficulty getting to the point where they're earning more interest than they pay is not because they lack the determination to succeed. Two of the biggest stumbling blocks to successful debt management are 1) saving too much, and 2) unexpected expenses.

It may sound counterintuitive to say that saving too much can be a problem, especially coming from a bank. After all, many experts say that you should have as much as three to six months' living expenses saved up. But consider this: the interest you pay on high interest debt is often exponentially larger than the rate you earn in a savings account, certificate of deposit or even a lot of investments.

So, when you make larger payments toward your debt instead of contributing to your savings balance, you pay less interest. And when you pay less interest, you can earn more interest in the long term, after those debts are paid off because you can save even more than if you had not paid them off. It simply does no good to pile up savings while you continue to pay a lot of interest toward credit cards and the like.

Does it make sense to put every dollar you can toward paying off your debts?

It does, but you may also wish to start an emergency or "rainy-day" fund.

This is where the 'unexpected expenses' we spoke about earlier, comes in. Let's say you have a modest amount of money (around $1,000 or so) in a safe place, away from your other funds — perhaps in an Ally Online Savings account or even in a No Penalty CD. If you're suddenly faced with having to pay for a medical bill deductible of $700, for example, your "emergency fund" is there for just such reasons.

You can pay the bill out of those funds instead of using a credit card, and your debt management plan won't suffer. Then, once you've replenished your emergency fund and continued to pay off your debt, you'll have even more cash available — not only to build a larger emergency fund — but also to build up your savings in financial products like the Ally High Yield CD.

Ally is here to help make managing your money easier, no matter where you are in your financial journey. Count on us for powerful financial products and convenient information that helps you make good financial choices.