Pay Off Debt or Save: Making the Best Choice
You want to pay off your debts, but you’re tired of throwing every spare dollar at them — especially when you know that you could be saving for your future or putting that money towards an emergency fund that could come in handy down the road.
The problem then becomes when you leave your debts unpaid, your interest payments will rise. On the other hand, if you open a savings account today, you’ll start to earn valuable interest right away.
So, the ever-present question remains — is it better to pay off debt or put your money into savings?
Paying Off Debts First
If you pay off pesky debt before you start growing your savings, you’ll move forward into a new financial chapter with a clean slate and clear state of mind. Plus, you can avoid adding interest on top of the debts you already owed.
Interested in starting with your debt? Check out these two methods for paying off your debt:
You can use the simple snowball method to pay off debts — starting with your smallest balance. Here’s how it works:
- Make a list of your debts, from smallest to largest amount.
- Note the minimum payment for each debt.
- Pay the minimum amount due each month and add $100 extra (or as much as your budget allows) towards the smallest debt.
- Once the smallest debt is fully paid, add its dollar amount to the minimum payment on the next smallest debt.
- Continue with the snowball method until all debts are paid off!
The snowball method builds healthy and productive habits for paying off debts and is easy to start doing right away. It also helps build momentum — once you pay off that first debt, you’ll want to keep going until you are debt free.
Snowball method not for you? Give the avalanche method a try. Instead of paying off your smallest bills, you attack the debts with the highest interest rates first. As you erase the debt with the highest interest, you put those payments toward the next highest interest rate until you wipe out your debts completely.
Once your debts are paid off, you can use these same methods to invest in your savings!
Always Automate Your Debt Reduction Plan
Take the guesswork out of your debt payments by automating your payments as soon as you decide on a method. This will allow you to budget your paycheck and avoid any penalties from missed or late payments.
When to Pay Off Your Debts First
As any financial advisor will tell you, paying off your debts is recommended as the best first step in building a stable financial future.
By crafting a strategy that allows you to continue to set aside money to pay off your debts, you start to create positive saving habits. Once your debts are no longer a worry, all of that newly available income can go towards an emergency fund, savings account or an exciting purchase or trip you’ve had your eye on — it’s important for you to enjoy your life and celebrate your victories too. Moving forward, do your best to avoid building credit debts so you can continue to maintain a healthy financial outlook.
Save Cash - Build an Emergency Fund
When your debts are low, the first step in your upward climb should be securing savings to use in the event of an emergency. Surprisingly, this should even come before putting money towards your children’s education — you never want to have to dip into their savings to help weather an emergency.
Debt Paid Off, Emergency Fund Secured — Now It’s Time to Build Your Wealth
Once you’ve paid your debts and secured your emergency fund, you can finally start building your wealth through investments.
Start saving for retirement by investing in your 401(k) and see if your employer will match your contributions. You could build compound interest and enjoy tax breaks from 401(k) plans or IRA plan contributions.
Likewise, education savings funds (such as a 529 plan) allow you to contribute towards your children’s education tax-free (up to a limit).
Lastly, give an investment app a try! These apps allow you to track your investments and find new opportunities.
When to Contribute to Savings First
If your debts are completely paid off (or at a manageable level) and your emergency fund has been put aside, you should officially begin contributing directly towards savings and retirement accounts! If this is your situation, you should already be comfortable setting aside money, so it shouldn’t be difficult to transition to a savings mentality.
Always Automate Your Savings
When you can, automating payments directly from your paycheck can ensure that you budget an appropriate amount towards savings.
The above information is provided for informational use only. Advance America is not responsible for any loss or damage resulting from your reliance on the material provided. This information is accurate as of the time it is posted; but it may not be updated regularly, so it may not be current information depending on when you read it. You should consult with your own financial professional when making financial decisions.