Between saving and paying off debt, it’s difficult to choose which should be a priority. This article will provide some guidance on what decision to make, best suited to your unique circumstances.
Should I Save Money or Pay Off Debt?
Everyone has different financial statuses, however, in general terms, the answer to the above question, is simple: Pay off your high-interest rate debts off first so you can save money easier. Why? Because over time, high-interest debts can cost more than you can save over the same amount of time. If the interest you are charged is higher than what you earn on savings, pay off the expensive debt first. This will help you save money by putting money back into emergency funds etc. Keep in mind that early repayment fees could be in place on your loan terms, so be sure to find out how much you can pay off without this fee being applicable.
It’s important to have savings to fall back on, regardless if you have debt or not. They ensure that if you need extra cash, you don’t have to take a loan out and incur debt. It is possible to save and pay off your debts at the same time by assessing your situation and deciding what to make a priority for some time.
When to make saving a priority
Certain situations would benefit from saving first then paying debts. These are:
If you have debt with a very low-interest rate
If your debt interest rates are lower than the interest rate on your savings account, then it makes sense to continue to save and pay off your debts another time.
You have access to a retirement savings plan
The crucial factor in retirement savings plans is time; the sooner you begin saving for retirement, the more you will receive as time passes. Contributing to your retirement in small amounts will benefit from compound interest and takes the burden away from saving when you are older.
You have not set up your emergency funds yet
When you have additional capital, it would be smart to put together an emergency fund first before paying off your debts. This will help you avoid using your debt for emergencies which could be counterintuitive to your priorities.
When to make debt payment a priority
As mentioned before, if your debt interest rates are higher than your saving interest rates, pay them off first. To do this, calculate how much income you have available after food, tax, necessities, etc. that can be used to pay off your debts. Set up a budget according to this and account for the monthly repayment you will be making. Avoid making minimum payments on your high-interest rate debts. This means putting as much as you can away on your debt after clearing your expenses and hopefully having enough to save.
How to save and pay off debts at the same time
Having a balance between saving and paying debts is ideal, however is dependent on your financial priorities and situation. Overall if you have extra income it is best to save and pay off at the same time. You can do this by;
- Budgeting smartly: Balance your income between needs, wants, savings, and debt. And make sure to cut back where you can so that you maximise your income. For example, subscription services or takeouts.
- Implement an emergency fund: Put 2-6 months’ worth of income away for unexpected expenses.
- Pay off your high-interest debts as soon as you can: This will help you avoid defaulting on a loan and dealing with the total high cost of your debt.
- Consolidate your loans into one low-interest loan: Debt consolidation can help you keep track of your loans if you have many with high-interest. It also offers lower interest rates, although over a longer loan period. Make sure that you’ll be able to cater to this with your income.
- Increase your income revenues: If you can, try to set up a side hustle or sell second-hand goods at markets, etc. This will give you more money to set aside for savings and debt payments.
By now, you should have all the tools you need to make your decision if you should save money or pay off your debts. Always make sure your financial goals align with your actions and you will be on the right track.