Are you struggling to find answers for should I save or pay off debt?
How to pay off debt quickly?
Should I pay off my car before buying a house?
Or should I invest or pay off debt?
The questions are worrisome and need your attention. This article will provide solutions for all your problems. It will help you decide whether it is better to save or pay off debt and achieve your long-term financial goals.
Imagine you are stuck in a difficult financial phase where you have no amount in your emergency fund, have debts, and have a limited income. Under such a scenario, have you ever given a thought to what should be your priority? It is essential to have funds in your hand. However, at the same time paying off the debt is a must to avoid interest build-up or bankruptcy.
It seems like it is the only financial priority you must deal with when you have debt. But, all together, one thing is for sure, you want to improve your financial condition. You can want to pay off debts and build retirement savings and emergency funds. All this, while managing monthly and unexpected expenses that come along.
We will look at some guidelines to help you decide how to go about your financial planning in such a situation.
Emergency Savings vs. Debt Payoff
You may want to choose one thing over another. But, let me make this clear as an essential tip that leaving any of these will lead you nowhere. It is wise to pick both and take steps to ensure none of the elements is lacking in your life. You should strategically manage your personal finance and grow out of this financial phase.
Your number one strategy should be creating a budget. A budget will present you with a real financial picture and help you allocate amounts. It will guide you to save money or pay off the debt in a systemic way. Or at worst, pick one with the least bad results. It will also keep you away from financial burnout and unnecessary stress.
Once you have a functional budget plan, you will see that you can pay debt and save money simultaneously. Instead of making a priority, it is time to make a strategy.
Before looking at the steps for paying off debt and saving money, first, we must start by looking at the benefits of both.
Benefits of Paying Off Debt?
The benefits of paying off debts are as follows:
- Helps in improving credit scores.
- Relaxes your mind from unnecessary stress.
- Overtime can reduce the amount of interest you pay
- Decreases the number of bills you have to pay each month
- Once your debt is cleared, you can focus on building a financially secure future.
So, does that mean you should use savings to pay off debt?
The answer is a big no.
Before jumping to a conclusion, you must learn the benefits of savings.
Benefits Of Saving
There are unlimited benefits of saving. The most important ones are mentioned here.
- Saving is a great way to achieve your financial goals, both short-term and long-term
- It helps you cover unexpected expenses without getting any new loan.
- Retirement savings are helpful at an old age.
- Savings help you take advantage of compounding interest.
- They help you achieve the feeling of security and mental peace.
We can see that it is equally beneficial to pay off debt and save. Before jumping towards preparing the guide, you need to evaluate your financial condition. First, go by asking yourself and honestly answering the following questions.
What is Your Job Situation?
Before you make any financial strategy, evaluate your job position or any fixed source of income. If your income flow is not stable, or there is any chance of losing the job, saving money for upcoming months is more important.
If you do not have sufficient funds to spend your upcoming months without a job, paying off debt holds no value. This is because eventually, you will be out of money and again at the mercy of credit cards for payments. If you have sufficient savings to support a month or two, you can use that amount to run your monthly expenses. Moreover, you can even pay off the minimum of debt.
Before you plan to pay off your debt, just save the amount for the upcoming months. Additionally, work to grab a secure job position at a similar or better salary package. Streamlining your income is vital to support your financial goals.
How much do I have in the emergency fund?
The amount in your emergency fund greatly impacts your overall financial strategy. Experts say at the minimum, you must have funds to support three-month expenses. The best way to calculate the appropriate amount in your emergency fund is to keep track of your income for a year and divide it by $10000. The resultant is the amount you must be saving to make through the jobless period.
Do I need any other savings?
Sometimes, the situation is reversed. Expected expenses pile up and are more stressful than unexpected expenses. If you plan to buy a car or mortgage a house in the next 5 to 10 years, start saving a little from today. Savings will help you from higher interest rates and absolute dependency on lenders. You can place these savings in a separate saving account or invest them in growing the amount.
After answering these questions, look up the following guidelines to plan your financial strategy.
Step 1: Pay Minimum Of All Debts
Unpaid debts pile up a house of debt for you. Paying minimum payment for all debts should be part of your monthly budget. It is important to pay the minimum of all your debts. This will help you to regulate your credit score and avoid an increase in the interest rate.
Also, make sure you make your payments before the due date. This is due to the fact that it adds up late fees, or increases the interest charges. These all add more financial stress to the debt.
Step 2: Prepare Emergency Savings
As you keep paying the minimum on all your debts, it is time to move ahead. It is essential to keep contributing to growing your emergency funds. They serve as a buffer to absorb the shock of unexpected expenses coming your way. You must cut down most of your expenses to deposit at least $1000 in your emergency fund. This amount will support you in times of need, and you will not require any additional loan from the credit cards.
Step 3: Make Use Of All The Available Funds
Look around and see if you have any additional money on your plate. This includes encashing any extra stuff at your home or getting benefits from your employer. Grabbing these low-hanging financial fruits and banking on it will greatly help you. This way, you can have some additional amount that you can use to pay off debt. You can also save this for a house, car, or make some profit by investment.
Step 4: Pay Off Credit Card Debt
Eventually, you are at the stage of paying down credit card debt. If you are thinking about how to pay off debt quickly, it is a good sign that you are growing financially. Paying more than the minimum amount of your credit card loan will help you lower the interest rate. Additionally, it will help you to get rid of it before the expected time.
Step 5: Fund Your Emergency Savings
When your debts are cleared, it is time to grow your emergency saving by funding them at the maximum. As mentioned before, you must at least reserve a fund equivalent to 3 to 6-month expenses in cash before you deposit your savings in investment schemes. The amount in your emergency fund will support your expenses at the time of need. It will also provide a barrier to taking any debt in the future.
Frequently Asked Question (F.A.Q.)
How much money should I save every month?
Follow the 50/30/20 rule for saving every month. This means keeping 50% of your income for your essential expenses, saving 30%, and keeping 20% for anything else. If you are short on budget, you should save 10% of your total income at any cost. Creating a proper budget helps you allocate resources tactfully and save more.
How can I pay off debt faster?
Debt snowball and debt avalanche are great methods to pay off debt faster. Both methods help you in gaining speed in paying off your debt. This is by focusing on one debt at a time by paying large sums of amount. In the snowball method, you start off by clearing small debts and using funds to clear off bigger debts. The debt avalanche method uses an anti approach where you begin by paying bigger debts.
Managing your finances properly is a necessity. People are often stuck between paying off debts and saving amounts for emergencies or future expenses. Assessing your financial condition and deliberately constructing a financial strategy can help them overcome debts and eventually strengthen their savings and retirement accounts for a secured future.