Pay Off Your Debt Or Save?

Do you have some extra cash right now?

It’s understandable if you are wondering as to what you can do with your money. Should you pay off your debt or is it better if you save it? 

When you try to do the math, it might make more sense to pay off your debts first but things are not so simple when it comes to financial matters. 

Things to Consider

There are several things that you need to consider when deciding whether you should pay your debts or just save the extra money you have. For example, if you do not have an emergency fund, that means you could end up using your credit card in case something unplanned happens. That would put you back to square one again.

Another thing to consider is the interest rate of your debts. If the interest rates are high then that means you’re money is just going to interest rate payments.

Why Saving Should Be Your Priority

There are several reasons why saving your money first and then paying debt, later on, is the smarter option. Here are some of those reasons:

  1. When your debts do not have high-interest rates, it makes sense for you not to prioritize paying them off. You would be better saving your money first.
  2. Another scenario where it’s better to save is if you have access to a retirement savings plan in your work. It’s even more compelling to save money through that if your employer matches what you put in. Your goal should be to get the maximum employer match.
  3. Some try not to save for their retirement until they are debt-free. That’s the wrong move because you will soon run out of your most valuable resource; time. When will you become debt-free?
  4. But the main reason why you should prioritize saving is so that you can be ready for any emergency. It’s crucial that you have an emergency fund ready for anything that might happen.

The fourth point is even more crucial if you are one of those who cannot cover a sudden expense of $1,000. Not having an emergency can ruin all of your plans if you’re not careful.

How Much Should You Save?

So, it’s now clear that it’s better for you to save money first. Now the question is, how much should you be saving?

When it comes to your emergency fund, it should cover your expenses, ideally, for six months. Other financial experts recommend saving enough money to cover your expenses for a year.

The Ideal Approach

The ideal approach for you to strike a balance between paying your debts and then setting aside money. Having an emergency fund can give you peace of mind, knowing that you will be okay no matter what but paying off some debts may be necessary to put your finances in order.

If you are unsure which approach is best for your situation, then you should consult a financial planner who can guide you as to what is the best step for you to take.