If you’re in the position of having extra cash and deciding whether to pay off debt or save money ask yourself if you’re completely aware of your actual financial situation and lifestyle goal. Understanding where you are today and where you would like to be tomorrow is important in determining the right course of action to take.
Ask yourself these three questions:
- Do you have/need an emergency savings account?
- How much is your debt costing you?
- What are your financial goals?
This is all about balance and not about finding an absolute rule whether to pay off debt or save money first.
Pay Off Debt First
Some experts believe you should payoff debt before savings. For example, you’re earning 1% on a savings account and paying 19.99% on credit card debt, you’re losing money. You’re saving money but you’re actually losing more money. In this situation it’s important to pay debt off sooner than later to lower the amount of interest paid.
Save Money First
Other experts may argue the importance of saving money as a priority over debt payoff. In other words, the goal is to save at least 6 months of liquid (available) cash for emergencies. This approach may cost you more in loan interest payments but you won’t add onto your debt when an emergency arises.
Saving Money and Paying Off Debt at the Same Time
You can choose to be systematic and pay off debt and save money at the same time. This requires creating a budget and a strict discipline in following the plan. Make sure your allocating money towards a savings account and increasing your loan payments. An additionally $10 can go a long way in paying off debt sooner. Additionally, by saving money towards an emergency fund, you’re building a healthy savings habit. It may also keep you motivated by knowing your paycheck isn’t going to just debt, but you’re saving a bit for yourself.