We are almost at the end of January, a time when our New Year’s resolutions may begin to falter. If one of your resolutions is to start saving more money, or to pay down debt (or even both!), the tips below may help you get back on track and regain the momentum to accomplish your resolutions.

1. What if I can’t afford to save or pay down debt? The first step is to build a budget: income minus expenses. Surplus income should be used toward saving more and/or paying down debt. If you have a deficit (i.e., you are spending more than you are making), you should determine where you can cut back on expenses to create the surplus needed to save more and pay down debt.

   The reality is, you can’t really afford not to save. Even small amounts are better than none. Most people typically get a raise at the beginning of the year, and that increase is a great way to start saving more or paying down debt without feeling like you are taking a pay cut.

2. Should I pay off debt first or start saving? Mathematically, it makes sense to pay down debt first, as you are probably paying a higher rate on the debt than you would be earning in a savings account. However, if you don’t have any savings and face a sudden emergency, you may end up having to take on more debt to pay for that emergency. Building up a small emergency fund of about $1,000 before you start paying down debt can help keep you out of debt in the long run.

   Another situation where saving first usually trumps paying down debt is when you have access to an employer-sponsored retirement plan with an employer contribution match. You should contribute at least the minimum in order to receive the full match, as anything less means effectively leaving free money on the table. Even small contributions can add up over time with the power of compounding interest.

3. If I have extra money to pay down debt, what debt should I pay down first? There are a couple ways to answer this question, depending on your situation and motivation. 1) Apply surplus income to the debt with the highest interest rate, which will save you from paying more in interest over time, or 2) Apply the surplus income to the debt with the smallest payment or the debt with the smallest balance. This method allows you to pay off one debt and then roll the finished debt payment into the next debt payment. This “snowball” effect (i.e., like a snowball rolling downhill, continuously getting larger) allows you to keep increasing the amount you have available to pay down the rest of your debt.

4. How much should I have in savings? A fully funded emergency fund should cover about six months’ worth of expenses. Look for a high-yield savings account to deposit the funds in. You should avoid investing or locking the funds up, such as in a Certificate of Deposit, because you want them to be liquid and easily accessible if you need to use them. Once you have a fully funded emergency fund, you can then start taking any excess income and using it to start an investment account, or to increase the contribution to your retirement account if you have not yet contributed the maximum amount for the year.

5. Should I pay down my mortgage? Not all debt is created equal and having a mortgage is not the same as carrying a high credit card balance. While paying down a mortgage will save you interest costs over the long-term, the lender is unlikely to recalculate and lower your monthly payments. Furthermore, the interest rate on your mortgage is probably much lower than the interest you are being charged on your credit card(s). Given today’s low mortgage rates, you have a high probability of achieving greater returns in an investment account than you are paying in mortgage interest.

   If you are maximizing your retirement account contributions and are able to save after-tax dollars and still have excess income, then making extra principal payments on your mortgage may make sense. The extra payments will help reduce the amount of interest paid on the principal balance and will help pay-off the mortgage faster. Don’t worry about losing the mortgage interest tax deduction in this case, as you will likely save more in interest than you would have received in tax deductions.

An ideal solution is to find a balance between paying off debt and saving more money. However, every individual’s situation is different and there is no one-size-fits-all answer. We offer expert guidance and will work with you to develop an individualized plan to help you accomplish your financial goals, or in this case, New Year’s resolutions.

Consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this paper is not intended as legal or tax advice.