Should I Save or Pay Down Debt?
Paying off debt and building savings are very important financial objectives. Here some financial planning tips to help you decide on what to focus on.
Paying off debt and building savings are very important financial objectives. Yet, deciding between saving money or repaying the debt is a common dilemma.
There is no one size fits all approach. There are certain scenarios when - prioritizing paying down debt – makes more sense. There are also other scenarios where it makes more sense to build up your savings. Here are some things to consider:
Emergency Savings Fund
If you don't have a rainy day fund, then you should focus on saving money. I know, this sounds a bit counter intuitive, but let me explain.
Your emergency (rainy day) savings should cover three to six months of living expenses. If you focus on debt without a rainy day fund you may have to borrow to cover unexpected expenses or job loss.
Building an emergency savings fund protects you from more debt in case it gets tough.
When dealing with a lot of debt can weigh down on you and high interest debts are the worst! Before saving money, you should pay down high interest debt.
The interest rates on credit cards and personal loans can be more than saving or investing. So, reducing the balance on high interest loans can give you a lot of financial gains.
You can also tackle the interest rate problem by reducing the interest on your loans. One way to achieve this is by debt consolidation or balance transfers for credit cards. With high interest debt gone, you can split between paying off other debt and saving money.
Guaranteed Free Money
There's another situation where it makes sense to focus on savings before debt. Retirement Savings! Contributing to a retirement savings plan as part of your job is always a good decision. Especially if there is a matching contribution from your employer.
Not only is a retirement plan a valuable asset. The money you contribute to your retirement plan could reduce your tax burden. Also, with compound interest and employer matching, your contributions could grow.
Employer matched retirement plans a.k.a guaranteed free money can help with your money goals. Before paying down debt, contribute the least to get the most of out of your retirement savings plan.
The Perfect Solution for You
The choice between savings and debt depends on you and your financial situation. The perfect approach is to find a balance that works for you and stick to it.
Even with high interest debt, it's still advisable to save for a rainy day. This is important and will keep you our of the debt cycle when sudden expenses come.
Solooble makes it easy for you to stick to your financial plan. You can automate your debt payments and savings.