Should I save my money or pay off my debts first?
You earned a little extra from your last paycheck and have some left over after you’ve paid off your mortgage or rent, plus any other necessary bills. Instead of spending money frivolously, you want to store it in a savings account or use it to take down some debt that has been weighing you down.
But here’s the million dollar question: Should you save your money or pay off your debts first, especially when it comes to spending extra profits in the long run?
In fact, both paths can be beneficial. But let’s break down the benefits of saving your money or paying down debt first, so you know what to do on the next payday.
Saving Money – When is it a good idea?
Saving Money Always Smart, and it’s easier than ever, thanks to autosave apps. In addition, the banking and finance industry offers its own tools thanks to AI Chatbots and similar developments. In any case, saving cash can be an excellent option if you want to make enough money for any of these goals.
An emergency fund is a little extra cash to hide for a proverbial rainy day. With an emergency fund, you don’t have to take out a loan or use your credit card to cover the cost of car repair, home repair, or even simple medical bills. In addition, an emergency fund can help guide you from one job to another if you lose your current job due to a global event such as a pandemic or something else.
If you do not have an emergency fund, you may need to take out personal loans that allow you to borrow money for a set period of time. However, sooner or later you will need to pay off the loans, and add another debt to reckon with later in the future.
Save for a big buy (necessary)
It’s also a good idea to save money to make a big purchase instead of using a credit card or loan whenever possible. Save for a TV, a new car, or even new furniture for your home, and you’ll avoid damaging your credit score, as well as exercise good financial responsibility.
Add to your 401(k) plan
If your employer has a 401(k) plan with a good matching ratio, it doesn’t make sense to transfer some of your paycheck to that plan, so you can tap into your maximum retirement savings ASAP.
Benefits of paying off debt quickly
However, it may also be wise to pay off your debts quickly with a winning strategy for your money for the following reasons.
Multiple debts at separate interest rates
If you have multiple debts in your name and each has a separate interest rate, the interest will accrue on each of those debts. Over time, this can negatively affect your portfolio and lead you to pay far more money per loan over its lifetime than you would otherwise. If this is the financial situation for you, it may be best to pay off your debts as soon as possible until the multiple interest rates stop accumulating.
Do you have debt collectors calling you?
If your debts are so bad that debt collectors or other organizations are constantly stalking you about making payments, paying off your debts sooner rather than later may be your best option.
Your credit score is declining
If your credit score drops significantly and continues to drop, you can stop that by paying off your debt quickly and start rebuilding your credit shortly after.
How to save and pay off debts simultaneously
In some cases, you may not have to save money or pay off your debts; You may be able to do both at about the same time and take charge of your finances. Here’s how.
Pay off debt the snowball way
The snowball method of debt repayment involves paying off the smallest debt under your full name as quickly as possible. Then, once you’re done with those debts, move on to the next higher liabilities, then the next highest liabilities, and so on until you’re debt-free.
When you do this, you’ll pay less money in interest over time and simultaneously rebuild your credit score.
Of course, if you decide not to pay off your debts as quickly as possible, you may want to invest in life insurance. For example, if you died unexpectedly, some of your debts might be transferred to others in your family, such as your spouse. A comprehensive life insurance policy that comes with guarantees like death benefits for your spouse or family members can provide enough cash to pay off your debts and keep them from being affected for years afterward.
Save after paying off your debts
Once your debts are settled, you can start saving aggressively again. Any money you’ll direct toward your debts can be put into a savings account, in a 401(k), or otherwise saved for future financial goals.
How much should you save?
Although it is a good idea to save any amount of money, many experts recommend that you should build your own emergency fund, so that it is sufficient for your expenses between three and six months. To make enough cash for this, store it in a savings account, and you’ll be reasonably safe in the event of another major economic disruption like the COVID-19 pandemic.
Create an emergency fund
For starters, create an emergency fund of at least a few hundred dollars by saving aggressively for the first few weeks or months of your plan. Once you have that emergency fund, you can move on to the next step. You can use the emergency fund calculator to calculate money for an appropriate amount of emergency savings based on your income, bill payments, and more.
In the end, saving money and paying off your debt is a wise decision – you should be proud of yourself because you are thinking about both rather than wasting any extra money you have.
With the right plan and some self-reflection, you can decide if it’s best to pay off your debts first, save money until you have a small egg in a savings account, or do both at the same time, depending on how much money you have to work with.
The Post-Personal Finance Dilemma: Should I Save My Money or Pay My Debt First? It first appeared in Due.