Should I save my money or pay off my debt first?

You’ve earned a little extra money with your last paycheck and have some left over after paying your mortgage or rent, plus other necessary bills. Instead of spending the money frivolously, you’ll want to put it away in a savings account or use it to eliminate some of the debt that’s been weighing heavily on 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 earnings?

In truth, both paths can be beneficial. But first, let’s discuss the benefits of saving your money or paying down your debts, so you’ll know what to do next payday.

Saving money: when is it a good idea?

saving money is forever smart, and it’s easier than ever, thanks to auto-save apps. Furthermore, the banking and finance industry offers its own tools thanks to AI Chatbots and similar developments. In any case, saving cash can be a great option if you want to accumulate enough money for any of these goals.

emergency fund

An emergency fund is a little extra money that you save for the proverbial rainy day. With an emergency fund, you won’t have to take out a loan or use your credit card to cover the cost of car repairs, home repairs, or even minor medical bills. Also, an emergency fund can help you move from job to job if you lose your current position due to a global event like the pandemic or something else.

If you don’t have an emergency fund, you may need to take out personal loans that allow you to borrow money for a set period of time. However, sooner or later you will have to pay off the loans, adding another debt to consider later.

Save up for a big purchase (necessary)

It’s also a good idea to save money for a large purchase instead of using a credit card or loan whenever possible. Save up for a TV, a new car, or even new furniture for your home, and you’ll avoid hurting your credit score, as well as practice good financial responsibility.

Add to your 401(k) plan

If your employer has a 401(k) plan with a good percentage match, it’s a no-brainer to funnel some of your paycheck into that plan, so you’ll get maximum retirement savings as soon as possible.

Benefits of paying off debt quickly

However, it may also be smarter to quickly pay off your debt with a win-for-money strategy for the following reasons.

Multiple Debts with Separate Interest Rates

If you have multiple debts in your name and each has a separate interest rate, each of those debts will accrue interest. Over time, this can really take a toll on your wallet and lead you to pay a lot more money for each loan over its lifetime than you otherwise would. If this is your financial situation, it might be wiser to pay off your debts as soon as possible just so the multiple interest rates stop piling up.

You have debt collectors calling you

If your debts are so bad that debt collectors or other organizations are constantly harassing you to make payments, paying your debts as soon as possible may be your best option.

Your credit score is falling

If your credit score has dropped significantly and continues to plummet, you can stop that by paying off 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 money or pay your debts; you may be able to do both at about the same time and take charge of your finances. That is how.

Pay off debt using the snowball method

The snowball method of debt repayment involves paying smaller debts in your name in full as soon as possible. Then, once you’re done with those debts, move on to the next highest obligations, then the next highest, and so on until you’re debt free.

By doing this, you’ll pay less money in interest over time and rebuild your credit score at the same time.

Of course, if you decide not to pay off your debts as soon as possible, you may want to invest in life insurance. For example, if he dies unexpectedly, some of his debts could be transferred to other members of his family, such as his spouse. A comprehensive life insurance policy that includes guarantees, such as death benefits, can provide your spouse or other family members with enough cash to pay off your debts and keep them from being burdened by them for years.

Save after paying your debts

Once your debts are paid off, you can start saving aggressively again. Any money you may have funneled toward your debt can be put into a savings account, your 401(k), or otherwise saved for future financial goals.

How much should you save?

Although saving any amount of money is a good idea, many experts recommend that you build up your emergency fund so that it is enough to cover three to six months of your expenses. To build up enough cash for that, keep it in a savings account and you’ll be reasonably safe in the event of another significant economic disruption like the COVID-19 pandemic.

make an emergency fund

To get started, build an emergency fund of at least a few hundred dollars by saving aggressively during the first few weeks or months of your plan. Once you have this emergency fund in place, you can move on to the next step. You can use an emergency funds calculator to estimate funds for an appropriate amount of emergency savings based on your income, bill payments, and more.

Resume

Ultimately, saving money and paying off your debts are wise decisions: you should be proud of yourself for considering both instead of wasting the extra money you have.

With the right plan and a little self-reflection, you can determine if it’s wiser to pay off your debts first, save money until you have a little savings in a savings account, or do both at the same time, depending on how much money you have. . you have to work with.

The post Personal Finance Dilemma: Should I Save My Money or Pay Off My Debt First? first appeared on Due.

Add Comment