You made some money with your last paycheck and you have some left over after paying your mortgage or rent, along with all the other necessary bills. Rather than frivolously spending the money, you want to put it in a savings account or use it to clear some of the debt that’s hanging over your mind.
But that’s the million dollar question: should you save your money or pay off your debts first, especially when it comes to spending extra long-term income?
In truth, both of these paths can be beneficial. But let’s break down the benefits of saving your money or paying off debt first, so you know what to do on the next payday.
Save Money – When is it a Good Idea?
Saving money is always smart, and it’s easier than ever, thanks to automatic backup applications. In addition, the banking and financial sector offers its own tools thanks to AI chatbots and similar developments. Either way, saving money can be a great choice if you want to build up enough money for any of these goals.
An emergency fund is a little extra money you put aside for the proverbial rainy day. With an emergency fund, you won’t need to take out a loan or use your credit card to cover the cost of car repairs, home repairs, or even minor medical bills. Plus, an emergency fund can help you move from job to job if you lose your current job due to a global event like the pandemic or something else.
If you don’t have emergency funds in place, you may need to take out personal loans that will allow you to borrow money for a fixed term. However, then you will have to pay off the loans sooner or later, adding another debt that you will have to reckon with later.
Save for a large purchase (required)
It’s also a good idea to save money for a big purchase rather than using a credit card or loan whenever possible. Save for a TV, a new car, or even new furniture for your home, and you’ll avoid damaging your credit score, on top of practicing good financial responsibility.
Add to your 401 (k) plan
If your employer has a 401 (k) plan with a good matching percentage, it’s a no-brainer to funnel a portion of your salary into that plan, so you can get maximum retirement savings as soon as possible.
Benefits of fast debt repayment
However, it may also make more sense to pay off your debt quickly with a winning strategy for your money For the following reasons.
Multiple debts with separate interest rates
If you have more than one debt in your name and they each have a separate interest rate, each of those debts will earn interest. Over time, this can really take a toll on your wallet and cause you to pay a lot more money on each loan over its lifetime than you would otherwise. If this is your financial situation, it might make more sense to pay off your debts as quickly as possible so that multiple interest rates stop accumulating.
You have debt collectors calling you
If your debts are so heavy that debt collectors or other organizations are constantly harassing you to make payments, paying off your debts as soon as possible may be your best bet.
Your credit score is going down
If your credit score has dropped significantly and continues to drop, you can stop this by repay your debts quickly and start rebuilding your credit soon after.
How to save and pay off debt simultaneously
In some cases, you may not have to save or pay off your debts; you may be able to do both at about the same time and take charge of your finances. Here’s how.
Pay off debt using the snowball method
The snowball method of debt payments consists in repaying the smallest debts under your name as soon as possible. Then, once those debts are settled, move on to the next highest obligations, then to the highest obligations, and so on until you are debt free.
By doing this, you will pay less interest over time and rebuild your credit score simultaneously.
Of course, if you decide not to pay off your debts as quickly as possible, you might want to invest in life insurance. For example, if you die unexpectedly, some of your debts could be transferred to other members of your family, such as your spouse. A comprehensive life insurance policy with guarantees like death benefits can provide your spouse or other family members with enough money to pay off your debts and keep them from being affected by it for years. .
Save once your debts are paid
Once your debts are settled, you can then start saving aggressively. Any money you would have spent on your debts can be placed in a savings account, in your 401 (k), or otherwise saved for future financial goals.
How much should you save?
While saving money is a good idea, many experts recommend that you build up your emergency fund, so it’s enough to between three and six months of your expenses. To accumulate enough money for this, store it in a savings account and you will be reasonably safe in the event of another major economic disruption like the COVID-19 pandemic.
Create an emergency fund
To get started, create an emergency fund of at least a few hundred dollars by saving aggressively during the first few weeks or months of your plan. Once this emergency fund is in place, you can take the next step. You can use an emergency fund calculator to calculate funds for an appropriate amount of emergency savings based on your income, bill payments, etc.
Ultimately, saving money and paying off debt are two smart decisions – you should be proud of yourself for considering both rather than wasting the extra money you have.
With the right plan and a little soul-searching, you can determine if it is smarter to pay off your debts first, save money until you have a little nest egg in a savings account, or do both at the same time, depending on how much money you have to work with.