Reduce Debt and Save

Learning Objectives

After completing this unit, you’ll be able to:

  • Identify ways to better manage your debt.
  • Explain the importance of emergency preparedness.
  • Find ways to build savings.

Debt and Your Wellbeing

Creating a budget helps you identify areas for improvement. For many of us that includes debt. Whether you are facing student loans, car loans, credit card debt, or a mortgage, mounting debt can be harmful for your overall health and wellbeing.

Debt can feel all consuming. According to Market Watch, it’s a leading cause of stress, contributing to relationship problems, mental health issues, poor diet, and many sleepless nights. As mentioned in the first unit, it’s a problem for all generations and income levels, and felt all around the world.

Salesforcelandian facing mounting debt.

The good news is that we can work on this together. We’re here to direct you to some resources that can help you better manage debt. Let’s start with understanding the difference between good debt versus bad debt from the experts at Bright Plan. We go through some key terms below. If you feel it’s needed, go ahead and take notes or jot these down in a Quip doc as a quick reference for later.

Get Smart About Debt

Good debt is money borrowed at a low interest rate that can improve your financial position over time (think credit score or a higher paying job). This can include a home mortgage or educational loan for certification or a degree in a high-paying field. This is the type of debt you want to take on. 

On the flipside, bad debt is something to stay away from or minimize. This is money borrowed at a high interest rate to buy things that go down in value over time such as credit card debt, personal loans, and car loans.

Bottom Line: Do your research, educate yourself about debt, or even talk to a financial advisor or coach before taking a loan. 

The Hidden Cost of Debt

Money Myth: Paying the minimum payment on a credit card each month is enough.

While you’re only obligated to pay the minimum payment on a credit card, doing so mainly pays the interest, money added to what you owe every month as a charge by the lender. It barely touches the principal, the actual amount borrowed. It can take years to pay off your credit card if you’re only paying the minimum payment each month. 

Let’s look at an example from Making Money Simple by Peter Lazaroff, the chief investment officer at BrightPlan. 

You buy a TV for $2,500 using a credit card, with a 16% annual percentage rate (APR) as your interest. Every month, you make the minimum payment of $50 until the balance is paid off. Lazaroff explains in this scenario, this creates $3,994 in interest costs over the nearly 22 years it takes to pay off the original $2,500 purchase. That's more than the cost of the TV! And the painful part is, you wind up paying a total of $6,494.

Salesforcelandians pointing at iceberg showing larger costs beneath the surface aligned with the story above.

Bottom Line: Debt can be tricky. While it may seem like you’re making progress toward your goals, there could be large costs hidden beneath the surface. Remember to do your research, educate yourself about debt, or even talk to a financial advisor or coach.



So how much debt is out there? Bloomberg reports the world’s household debt is around $46 trillion, and continually rising in many countries.

It’s not all doom and gloom—debt can be conquered and there are many helpful resources to help you reduce or eliminate your debt. 

Manage Your Debt

Debt happens. Much like budgeting, creating a plan is the place to start. Consolidated Credit helps explain ways to better manage your debt. 

  • Get organized. Use your credit report and account statements to see the balances and interest rates for each of your loans.
  • Check your credit report. A poor credit score can be the result of a missed payment, but paying down your debt can help it go back up.
  • Pay your bills on time each month. Late payments can result in late fees, which make it harder to pay off your debts.
  • Be strategic about debt payments. Pay debt down strategically with the highest interest rate debt first. (It may make sense to pay more toward a higher interest rate loan, and the minimum toward a lower interest rate loan for the time being.) When your first one is paid off, move to the next one.
  • Apply unexpected funds to paying down your debt. Receive a bonus or a money birthday gift? Use it to pay down some of your debt.
  • Consider seeking help. If you’re struggling to manage your debt and other bills each month, you may need to seek help from a reputable consumer credit counseling agency or a financial professional.


If you use a credit card, Better Money Habits recommends you try to pay off the entire amount each month. At the very least, aim to pay more than the minimum payment. 

Salesforcelandian ready to conquer a mountain of debt.

Create a Safety Net

Life can be unexpected. Emergencies like a car accident often lead to unplanned expenses, and these can add up quickly (think a trip to the emergency room, ongoing medical care, the cost to repair your car, rising insurance rates, and so on). 

According to a 2019 financial wellbeing report from Close Brothers, only 40 percent of UK employees feel prepared for unexpected financial costs or a significant reduction in their income. And consistent with all areas of financial wellbeing, more women are struggling to meet financial goals than men, with 52% of women reporting not saving enough for unexpected expenses versus 42% of men (PwC).

That’s why money expert Rachel Cruze of Ramsey Solutions recommends building an emergency fund which can provide financial security and give you peace of mind when you need it most.

  • Medical emergencies
  • Home or car repairs
  • Unexpected life events
  • Unemployment

So how much do you need? According to Cruze, a good rule of thumb is saving 3 to 6 months’ worth of expenses. No matter how much you choose to save, start now, put that money aside for a rainy day and don’t touch it! 

Salesforcelandian using an umbrella to shield from the rainy day.

NerdWallet suggests that if an emergency or the unexpected happens and you dip into your emergency savings, be sure to replace it when you are able—you don’t want to backtrack on the great progress you’ve made. And, per NerdWallet, once you have that emergency fund in a safe, high-interest savings account, it’s time to start thinking about your bigger savings goals.

Find Ways to Save

Ready to start saving? Consider building both an emergency fund and an additional savings account for things such as vacations, education, a new home, and more. According to Smart About Money, here are some ways to start.

  • Set a target amount for your emergency fund. If saving 3 to 6 months seems daunting, set a starter fund target of $1,000 or the equivalent of one month of expenses.
  • Open a separate savings account. It’s tempting to spend a hefty balance in your checking account. Having a separate account can prevent you from tapping into your savings.
  • Designate a set amount of money to put into savings each month. If you can, set up automatic bank transfers to your savings account every month to help make it as easy as possible.
  • Look for more ways to reduce your expenses and apply the balance toward savings. Remember the budgeting we just talked about to improve your cash flow? Use that cash to fill up your savings and emergency fund.
  • It’s OK to spend on something special (and for celebrating life’s wins). Treat yourself. Quick wins and celebrations can help you reinforce your habit change by keeping you motivated.

Money Exercise: Identify the amount you want to save and when you need the funds. Then calculate your savings goal to determine how much to contribute every month. 

Let’s Sum It Up

From tackling your debt to emergency preparedness to building your savings, learning how to better manage your finances builds on the foundation you start with budgeting. This leads to improvement of your financial wellbeing. To truly attain that financial freedom, be intentional about managing your debt, creating a safety net, and finding ways to save. 

Now that you understand how to become more financially secure in the present, let’s talk about how you can prepare for the future in the next unit.


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