Save First Or Pay Off Debt

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When I finally realized that I needed emergency savings, I had to make a tough choice to decide whether to pay off debt now or start saving money. This is a difficult decision because I know both are important. So which one should I choose first?

Save First Or Pay Off Debt

I started cutting numbers. It’s easy to feel the pressure to save, but sometimes it’s not worth it. For example, I had several high-interest credit cards that charged anywhere from 20%-25% interest. To keep up with my credit card payments, I pay $160/month in interest. The hard truth is that even if I pay the minimum and put my extra money into savings, I will still lose money.

Save For An Emergency Or Pay Off Debt First?

Today, if you are trying to make a difficult decision to pay off debt or start saving, I hope this article will give you the knowledge to make the right decision.

I have learned from experience that it is better to eliminate high interest debt before saving for an emergency fund or adding to your retirement. In general, if you have high interest debt with an interest rate of more than 5%-7% and it is not tax deductible, you should pay it off before saving. The simple truth is, you don’t earn as much interest on your savings as you do on your loan interest payments. Simple math concludes that if you pay more interest than you earn, you lose money.

Remember, paying off debt before you save isn’t for everyone. If you decide to pay off your debt first, it means you won’t have money for emergencies that could leave you in more debt when unexpected expenses hit.

The main debt you should focus on is consumer debt. Consumer debt is used to finance expenses rather than investments and includes things like credit card debt, payday loans and rent-to-own contracts.

Is It Better To Pay Off Debt Or Save Money First?

Consider this example. Suppose you have $1,000 in savings earning 0% interest and you have $1,000 in credit card debt that costs you 10% interest. Basically, your net worth is zero, because your assets ($1,000 in savings) minus your liabilities ($1,000 in credit card debt) equals zero. Every month, your net worth goes down because you’re earning interest on your debt while you’re earning nothing from your savings.

If you pay off your credit card debt using your savings, you basically stop losing money while your net worth remains the same. The hard part is that you don’t have $1,000 to comfort you, but that comfort comes at a high price with little return.

Paying off high interest debt first has another big advantage. If you’ve been struggling to improve your credit score, deciding to tackle your debt early can really jump-start your plan to improve it. Debt factors like credit cards and consumer loans have a big impact on your FICO credit score. In fact, the amount you owe is 30% of your score. Great!

The number one thing you need to do to improve your credit score is to check your creditworthiness. You can do this in a short amount of time by paying off your debt and reducing your balance. This will allow you to qualify for a lower interest rate that you can use to pay off your loan faster. I used this exact method to pay off over $7,500 in credit card debt using a balance transfer.

Should You Invest, Or Pay Off Debt First?

I recommend this option if your loan interest rate is very low. If you decide to save money before tackling your debt, I recommend building your emergency savings first before focusing on saving for anything else. Consider a Savings Builder Account from CIT Bank.

Unexpected expenses are a big reason why people go into debt in the first place. If you have a low-interest loan and focus only on paying it off, unexpected needs can have major consequences. This can force you to borrow again and become a vicious cycle that is difficult to break.

If you want to focus on savings, I suggest you focus on a small emergency fund of at least $1,000. It covers minor emergencies and gives you a good place to start. If you want to plan for the long term, I recommend you save enough for 3-6 months of expenses. The best way to figure this out is to add up all of your monthly expenses (bills, groceries, baby expenses, etc.) and multiply that number by 3.

Another area you should focus on is your retirement fund. If you have an employer that offers an employer-matched retirement plan, this is something you should take advantage of. You don’t have to dedicate all of your extra funds to retirement, but you should contribute at least enough to get an employer match. This is basically free, guaranteed money you can’t lose. Thanks to compounding, even the smallest contribution to your retirement plan can reap big rewards in the long run.

Free Dave Ramsey Printables To Keep You On Track Story

To this day, I still have debts that I want to overcome. Sometimes you don’t feel comfortable with the strategy, no matter how financially logical it is. This is where I found myself. If you’re like me and need peace of mind by setting aside savings and keeping up with debt payments, you can come up with a strategy to do both.

If you want to pay off debt and still maintain and improve your overall financial picture, the first thing you need to do is determine what you want to achieve.

For example, if your goal is to build a small emergency fund of $1,000 and pay off debt at the same time, you can set aside $50/month for savings while using the remaining funds to pay off debt.

Savings for raising will give anyone peace of mind. In fact, if you are not comfortable or stressed about what strategy to focus on, it will prevent you from sticking to your financial plan. It is important to do what is best for you regardless of what you read or hear.

How To Pay Off Debt In 2023

I was able to save over $4,000 and still pay off over $7,500 in credit card debt by completing both strategies, paying off debt and saving money. I started spending a large portion of my spare funds paying off high interest credit cards. At the same time, I put a small amount into my savings account every payday. It’s a small amount, only $25/twice a month, but it gives me peace of mind that I’m building a savings that I can fall back on if something happens. This peace of mind and comfort gave me the right financial mindset to continue my financial journey.

Over time, my credit score gradually improved and I was able to use balance transfers to help reduce my credit card debt even faster.

If you have a lot of high interest debt on a limited income and don’t have a lot of spare funds, I recommend paying off your debt first. After 6 months, if you feel like you’re making significant progress, try putting $25-$50/month into a savings account. It’s important to remember that you don’t have to just do one or the other.

Feedback is not provided or commissioned by Bank Advertiser. Feedback is not reviewed, approved or otherwise approved by Bank Advertiser. It is not the Advertiser Bank’s responsibility to ensure that all posts and/or inquiries are answered. One of the questions I get asked a lot is whether it’s better to pay off debt or save money. And to be honest, it wasn’t that long ago that I struggled with this dilemma.

Is It Better To Pay Off Debt Or Save Money?

As I was trying to rebuild my finances, I read article after article that said:

As someone living paycheck to paycheck, I was crushed. How am I supposed to do any of these things (let alone all three) when I can afford to pay my bills every month?

Given the amount of anxiety I have surrounding this question, it’s really no surprise that many people struggle with it as well.

In this post, I answer the age-old question that we all have at one time or another. What should you do first: pay off debt or save money?

Is It Better To Pay Off Debt Or Save?

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