Should I pay off debt or save? This question will come up every time anyone with debt is building a financial plan. You may be asking should I pay off my debt before I start saving or should I save first? Or you may be wondering if you should do both at the same time. Ideally, we would like to do both. So let’s look at ways you can do both, pay off debt and save.
First of all, take a detailed at your debt. It is likely you have different categories of debt. You may have mortgage, car loan, student loan, and credit card debt. All these will have different interest rates. You may have debt that has high-interest payments and some debt with low-interest payments. As a general rule, you should be working to reduce debt with high-interest payments first, which makes sense, pay off debt that is hitting you with high-interest payments. Once you have paid off high-interest debt move on to lower interest debt.
Now that you have a plan to tackle your debt, the next step is to look at your savings. Here you should be considering if you are living paycheck to paycheck, how much you already have in savings. If you already have debt, then it’s all the more important to have an emergency fund. This is in case something unfortunate were to happen such as losing your job. You don’t want to get deeper in debt while you look for your next job.
So what’s the best strategy to both pay off debt and save? A starting strategy depending on your income is to take a balanced approach. Pay off as much debt as you can while saving a little as well. Ideally, you should have enough in your savings to keep making debt payments for at least four to six months were you to lose your job. Start by making automatic direct debit deposits from your paycheck in your savings. This will ensure you are regularly making deposits in your savings.
Another strategy is to pay off debt first and then think about savings. This will mean cutting back on your expenses to pay off your debt as quickly as possible. This will mean making significant cuts in your monthly expenses. While it may seem painful at first the benefits do outweigh the short-term pain.
The strategy you choose will depend on your household income and individual situations. Your debt reduction and saving goals will be dictated by the state of your financial health. If you are deep in debt, then perhaps you need to be brutal in cutting your expenses to dig yourself out of debt.
Always prepare a household budget, building a budget will give you a clear picture of your financial state and which approach to take.