Balancing debt and savings? Look at your finances as if you were CEO of a business

Many millennials are entering the workforce with high levels of student debt. Others have borrowed money to launch a new business, professional or technology venture. Still others find themselves slipping into credit card debt because they are spending more than they are earning each month.

At the same time, many workers in their 20s and 30s want a savings program to buy a new car, move to a more expensive apartment, or purchase a home. They may also recognize the importance of contributing to their employer’s 401(k) or an Individual Retirement Account (IRA).

So, how can millennials balance these competing financial goals and obligations, without putting undue stress on their lives?

One strategy is to look at your personal finances as if you were the CEO of a business, making fact-based decisions based on your own priorities. It’s an approach that can be helpful in lowering the financial stresses in your life and give you more confidence in the future.

Analyze your debts

First, let’s look at the debt side of the balance sheet. If you own or operate a business, you might need to borrow money to purchase new equipment, add to your inventory or open a new office. In this way, debt can actually have a positive impact, helping you to achieve your business goals.

In the personal sphere, some forms of debt can also be beneficial. Your student debt, for example, could be considered a form of capital investment in developing your skills. Ideally, an undergraduate or graduate degree can increase your income enough to deliver a positive return on your educational investment, so you could pay off that debt as rapidly as possible.

Other types of personal loans also fall into the capital improvements category. You might need a car loan to finance a new vehicle or a mortgage loan to buy a house or condominium. If you have a sufficient level of income to make the payments, those types of loans can be very beneficial in terms of improving your lifestyle.

On the other hand, rising levels of credit card debt can indicate that your monthly spending is exceeding your income. That’s a danger sign in business. If you were the CEO, you would need to boost your sales and revenue and cut expenses. Otherwise, you might have to file for bankruptcy or just close your business.

The same approach applies to your personal life. You need to find a way to increase your income, such as taking on a part-time job, or cut back on your monthly spending. For instance, cutting back on restaurant meals, clothing or entertainment expenses could help you balance your household budget.

Since credit card debt almost always carries a higher interest rate than student, automotive or mortgage loans, it makes logical sense to start paying off those balances first. That will also reduce the size of those monthly bills, freeing up those dollars for more productive purposes.

Consider your saving options

There’s no reason you can’t start a savings and investment program at the same time you’re paying off your debts. It’s just a matter of setting aside some money from each paycheck, perhaps moving it to a savings or money market account so you’re not tempted to touch those funds.

In the business world, it’s also a good idea to set money aside for the future. For instance, a company might save funds in order to pay its employees and vendors in case of a significant drop in revenue. Other money might need to be set aside to pay taxes, hire new employees or develop a new product or service.

▪ For millennials, a savings account can provide financial protection in the event of an unexpected expense or a drop in income. Having a nest egg that is equivalent to three to six months of income can cover those risks, while reducing the financial stresses in your life.

▪ Contributing to a qualified retirement plan like a 401(k) or IRA can be another good step toward a healthier financial future. Every dollar you contribute is typically subtracted from your taxable earnings, giving you an immediate benefit. If contribute $1,000 to an IRA and are in the 25 percent tax bracket, for example, your income tax would fall by $250. You wouldn’t have to pay that tax until you withdraw the funds in retirement.

▪ It’s not easy to find the right balance between paying off your debts, saving for the future and enjoying your current lifestyle. A financial advisor can help you sort through your options, and take control over this important aspect of your life.

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This story was originally published January 28, 2018 at 9:00 AM with the headline "Balancing debt and savings? Look at your finances as if you were CEO of a business."