Pay Off Debt or Save Money? How to Make a Decision
It is not a funny scenario anytime you recall that there is 25% interest rate on your credit card statement and yet you hardly keep away some money that can be used for other expenses. The general issue is that no one can do without debt and it is a case that happens to most households. It can be from mortgage loans to auto loans or probably to student loans, there are circumstances that would warrant you to borrow money for some certain reasons.
It is general that most people can’t do without debt and the question is now to decide on whether to pay off debt or save money. This is a serious question people need to think about before making any decision because it is directly going to have effect on your personal finance status. So if you are thinking about this case to know whether you should pay off debt or save money, keep reading this article has it entailed the necessary information on how you can make a right choice in such quest.
Should You save Money or Pay off Debt?
In any of the two options, you firstly need to know that your decision will be on the option that is best for you at such instance. However, kindly note that when you have debts with higher interest rate which will usually cost you beyond what you could make on returns from investing extra money, it is best appropriate for you to pay off the debt before you save money. However, if you are one of those that usually have emotional reaction in line with your financial status, it is expedient you focus on how to clear off the debts you may have before deciding to save money. This is because many people usually have negative emotional reaction to having debts. In this regard, it is much better to pay off debt in order to have greater peace of mind. This is a great way to have ideal stable emotional status which can further impact your other financial activities. It is safe to have a rest of mind than to be emotional unstable because of debt.
Which One Is Appropriate for You?
If you are at the point towards choosing whether to pay off debt or save money, it is great to know what you have and what you want before making any decision. It is in fact possible for you to put excess income into paying off some debts and still put other part into savings for future purpose but it requires that you have a good extra income before you can do this.
It is true that everyone need to put the money on where it will positively make great impact on the overall finance and it is best to calculate the option that will favor most when question about whether to save money or pay off debt arise. The truth is that there is no directional answer to the question as it depends on your status. However, the following steps might help you build a better financial profile:
- Allocate your maximum matched savings into a 401(k): If you are one of those that have employer which matches your 401(k) contributions, the appropriate thing you should do is to put as much as they are willing to match into your account every single match. This shows that regardless of the rate you employer choose to match, the money will be more beneficial to you.
- Build an Emergency Fund of Savings: Another great step you need to look into is by creating an emergency fund. The amount you can start with will certainly depend on your situation whereby it can include conditions such as whether you are living in a rent house or own a personal house, if you have kids, if you have any job security in your firm. In a nutshell, what you will have to put in the emergency fund will be determined by how much financial responsibility you have. People that still rent house or probably just got a career job can actually start with a little amount for emergency fund.
- When you focus paying off debt with high interest rates: In as much as you are able to contribute to your 401(k) and also engage in a smack emergency fund, the next thing for you to do is to focus on your debt. If there is any debt that have subprime interest rates or interest rates that is higher than 9% can firstly be dealt with. This is because interest rates that are high will certainly cost you more money that you can even generate on most investments and it is expedient you rather focus on paying those debts off so that you can pay less interest.
- Set your savings and debt priorities: This is a stage where you are having a good finance because you now possess an emergency fund and you have been able to settle high interest rates debt that might be consuming your budget. At this stage, it is now left for you to choose whether to pay off debt or save money. In a case whereby your debt rate isn’t more than the average rate of return for the stock market, then it is advisable that you invest your money and not to pay off debt. On the other hand, if the interest rates come above the 10% mark, you should better consider paying off the loan before even thinking of saving any money.
- Maintain your spending plan and be consistent in building your savings: The great about financial plan is that you don’t necessary need to pay off debt or save money as you can do both. You can have a good plan towards making sure you are free from debt and yet able to contribute into savings which can be used for future purposes. When you are able to build a better financial foundation, it will be easy for you to pay down your remaining debt while you still save for future.
Reasons to save first before paying debt: When you have debt with a very low interest rate, it is appropriate to save money first. Also, when you are able to have access to a retirement savings plan through your employer (if match is available), you can also save before paying off debt. Another great reason why it is expedient to save before paying off debt is to enable you build emergency fund.
Reason to pay debt before saving: In a case where you have high-interest consumer debt, it is important to pay off your debt before saving.
Before you can make any decision whether to pay off debt or save money, kindly look into your financial status as the reason of making choice is different for individuals.