What Should I Do - Save or Pay Off Debt?
So, should you save or pay off debt? It may seem impossible to do either, but with a plan (better known as a budget) and determination, you can find the balance to accomplish both simultaneously to help you reach your financial goals.
It’s not a matter of "what if," something happens, but "when". Life tends to throw us curveballs from time to time, sometimes with no breaks to recover in between! Paying off debt is important, and so is saving and planning for the future. Building savings helps you prepare for the unexpected, avoid debt, gain a greater sense of financial freedom, and relieve you of the burden of financial stress.
Establishing an emergency fund is essential to your financial health. It helps protect you when the unexpected happens – job loss, a flat tire, a broken appliance, a sick pet, or a trip to the emergency room. Unexpected expenses can impact your budget, especially if they are large, and they can cause you to go further into debt if you’re unprepared.
Financial experts recommend saving six to eight months of living expenses. This may seem out of reach to accomplish, but you can start small and work your way up, setting up attainable goals along the way. If you’ve found it difficult to factor in a budget for savings, try paying yourself first. Instead of relying on what’s leftover at the end of the month, you can set up an automatic draft to send a portion of your paycheck into a savings account. By paying yourself first, you remove the temptation to overspend (out of sight, out of mind), and you increase your savings over time. Also, consider using a Money Market account to hold your emergency fund to earn more interest than your checking account.
Pay Off Debt
If you’re in a position to continue paying off your debt, then be as aggressive as you can be by submitting payments that are more than the minimum balance due. Ultimately, paying down your debt frees up additional money you could use to boost your savings.
If you're serious about tackling your debt, it helps to approach it with a debt repayment plan. First, start off by knowing who you owe and how much you owe. To get a clear picture of all your debt, make a list of all creditors in order of highest to lowest interest rates, and the balances on each account. Two of the most common ways to pay off debt are the debt avalanche and debt snowball methods. These plans will help you achieve your goal of being debt-free.
Debt Avalanche Method
The debt avalanche method tackles debt with the highest interest rate first, working down to the lowest interest rate. While paying down debt with the highest interest rate, you'll continue making the minimum payments on all your other debts. If you have additional funds available, apply the extra funds to the debt with the highest interest rate. This method reduces your payments over time and saves money on interest.
Debt Snowball Method
The debt snowball method focuses on making the minimum payments on all debts and applying additional funds towards the smallest balance. Once the lowest balance is paid in full, you add that amount to the next lowest balance. You repeat this cycle until your debts are repaid. The snowball method allows you to build momentum with each balance payoff. With this method, you are able to see results faster and feel a sense of accomplishment.
No matter if you are concentrating on building your savings or becoming debt-free, you'll want to consider these practicals to accomplish your goal: create a budget and stick with it, cut the credit cards, trim your expenses, add a side gig to earn some extra cash, or explore debt consolidation. Everyone's situation is different, and there is no right or wrong choice, or one method to get you there. Whether you choose to focus on saving, paying off debt, or a balance of both, it's up to you. The right choice is the one that will motivate you to stick with your plan.