Should You Pay Off Debt or Save Money?
Student loans, credit cards, auto loans, emergency funds, retirement, buying a home… the list goes on and on. If you are in debt, the question of “should I pay off debt or save money?” has probably crossed your mind.
Paying off debt and saving money are both critical parts of maintaining a healthy financial life. But with a limited amount of money available each month, which should you prioritize first?
In this post, we are exploring some questions and circumstances to consider when deciding whether you should pay more than the minimum payment on debt or save money.
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Build an emergency fund
If you don’t have an emergency fund in place, then your first priority should be to save 3-6 months worth of expenses before tackling debt.
The accumulation of debt can quickly become a cycle. By building an emergency fund, you will avoid digging yourself further into debt in the wake of negative financial events like car repairs or medical bills. Once your emergency fund is in place, you can focus your attention on other financial goals.
Employer retirement contribution match
If your employer offers a retirement contribution match, then this is definitely something you want to take advantage of. If you aren’t utilizing an employer contribution match, you are effectively turning away free money.
Consider Interest Rates
When deciding whether or not to pay off debt or save money, take a few minutes to organize your total debt and determine their interest rates.
If you have very low interest rates, it could make more sense to prioritize saving money. On the other hand, if you have an interest rate on any debts that is 10% or higher, you should prioritize paying those off first after building your emergency fund.
Pick a debt repayment plan
Once you have an emergency fund in place and are taking advantage of any retirement contribution matches (if applicable), it’s time to pick a debt repayment plan! When you have a plan in place, you are much more likely to stick to your debt payoff goals.
The Debt Snowball
The Debt Snowball Method is when you order your debts from smallest to largest, regardless of interest rate, and pay the minimum amount on everything but the smallest balance. Once the smallest balance is paid off, you roll that money into the next smallest balance, and so forth.
The Debt Avalanche
The Debt Avalanche Method is when you take all of your debts and organize them from highest to lowest interest rates–regardless of their balance. Then, you focus your efforts on paying off the balance with the highest interest rates while paying the minimum monthly payment on every other balance. Once the highest interest rate is paid off, you roll that money over into the next highest rate.
Rebalance
As situations change, so do your financial needs! It’s always important to check in on your budget each month and prepare for upcoming events, goals, and expenses.
Let’s say, for example, that you want to pay off your student loans but get engaged and want to cash flow your wedding. This situation may cause a rebalancing of your financial strategy by allocating extra money towards your wedding savings for a short period of time.
Final Thoughts
You CAN pay off debt and save money. It just takes a little bit of planning, organization, and preparation.
When you have a solid plan in place, you are much more likely to achieve your financial goals!
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