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SAVE OR PAY OFF DEBT?
Should you save or pay off debt? I hear this question a lot!
If you’re fortunate enough to have an income that exceeds your bills (you will know this for sure if you create a budget), it can be confusing to figure out how to put that money to good use.
Is it better to pay off your debt or put that money into savings or investments?
Deciding whether to save your money or use it to pay off debt can be determined by examining a few important factors.
In order to determine what is best for your personal situation, you need to ask yourself four questions.
4 QUESTIONS TO ASK YOURSELF TO DETERMINE WHETHER YOU SHOULD PAY OFF DEBT OR SAVE
1. HOW RISKY IS YOUR SOURCE OF INCOME?
Your income source will be the main factor in what to do first.
If you’re in a rocky job or plan on starting a new job then you may want to save a little money first before paying off debt until you know your income source is solid and so you have that sense of security.
But on the other hand, if you’ve worked for the same company for 15+ years and expect to work for 15 more then paying off debt should be a priority.
You’ll also want to ask yourself how easily you could find a job if you were to get let go suddenly. If your salary is one you could easily replace with another job then you won’t need as much saved.
A stable income would tend to favor paying down debt, whereas less stable employment tips the scales in favor of saving a bit more before tackling debt.
I recommend having at least a small amount of savings ($1,000 or one month of expenses whichever makes you feel better) before tackling debt “just in case” but then I suggest you tackle that debt head-on.
Debt has interest and also causes a ton of stress.
Just think of how great it would feel to not have debt. Also, think about how much you could save once that debt is paid off and all those monthly payments are going toward savings!
2. DO YOU HAVE AN EMERGENCY FUND?
I mentioned this briefly in the first question but putting away some money is a good first step if you don’t have any savings at all.
Even with high-interest debt, having an emergency fund before attacking your debt will give you some sense of stability.
You’ll sleep better at night, too.
If you follow Dave Ramsey you know that he suggests having a $1000 Emergency Fund to start before digging into debt but to start paying off your debt as soon as you get that $1000.
If having only $1000 makes you nervous still then save a little more but like I mentioned earlier, that debt has interest!
Saving a months’ worth of expenses should be enough to make you feel more secure when tackling your debt especially if your income is pretty stable or if you can easily find another job if something were to happen.
Again if your income is rocky then you can save 2-3 months of income depending on how fast you think you would be able to replace your income.
That’s why the first question is so important. Make debt a priority but also make sure you are stable enough to start tackling it.
Once you get that security you want to tackle your debt immediately. If you already have an emergency fund then you need to start tackling debt now.
3. WHAT IS THE INTEREST RATE ON YOUR DEBT?
Your credit card interest rate might be 19% or more. No one, not even Warren Buffett, can routinely achieve that kind of return through investing and if you’re just sticking money into a savings account then you will definitely not see even close to a good return on that money.
Paying on a 15% debt is similar to earning a 15% return.
So if the reason you’re not tackling debt is that you want to invest money then tackle your debt first! That interest you’re paying on your high-interest credit cards is money down the drain.
MORE MONEY SAVING TIPS YOU’LL LOVE:
- How to Pay off Debt When You Have No Money
- How to Live on One Income and Thrive
- Ways to Make Money You May Not Have Heard Of
- 5 Ways to Get Paid to Shop
4. WHAT ARE YOUR FINANCIAL GOALS?
Your financial goals are important to set before making financial decisions.
A lot of people have an idea of their goals but they never actually sit down and write them out.
The simple act of writing out your goals will open up your mind and help you see the big picture of where you want to be a year from now, five years from now, etc.
To simply say I want to save money or I want to get out of debt is not enough. You want to think about how that would feel if you were to pay off all of your debt and save for emergencies, retirement, and vacations.
If you’re nearing retirement and already have plenty of money set aside, get busy eliminating your debt! You want to be debt free during retirement if you can.
Now that you’ve written out your financial goals. Look at them!
What would you need to accomplish in order to reach those goals? Most financial goals would be better achieved with no debt.
Thinking about buying a home? Buying an investment property? Improving your credit? Starting a business?
All of these goal examples are more likely to be achieved when you have no debt holding you back.
Avoid ignoring the emotions surrounding your financial decisions but also be aware that you may just be avoiding your debt because you don’t want to think about it.
Paying down debt and saving are both worthwhile options for your extra cash. Either choice is better than spending it but the feeling of being debt free is wonderful and paying interest on the debt is a huge waste of your money.
TIME TO MAKE A PLAN!
I know most people are just going to skim this article and think ok good ideas and move on but I want you to really think about becoming debt free.
Imagine how great it would feel to not have to make monthly debt payments. To be able to pay for things you enjoy paying for each month.
Sit down, create a plan and a budget if you don’t have one and get saving and paying off that debt!
If you’re struggling with debt or have any questions leave them in the comments! I read all my comments and I’ll be happy to reply!
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