Every day, many Americans ask themselves, “Should I save or pay off debt?” If you’ve asked yourself that question recently, you’re not alone.
In light of that, we have taken the liberty of answering this question once and for all. Keep reading to learn whether it makes sense to save first or to pay down your debts. Armed with this knowledge, you should be able to start creating a plan for how you intend to reach your financial goals.
Is it better to save or pay off debt?
Although keeping debt around for a while may cost you a bit more money in the long run, financial experts tend to agree that it’s a good idea to save up some money before worrying about paying off your debts. In this case, their rationale is that having an emergency fund will help stop the debt cycle. Put simply, if you have some extra cash lying around when an unexpected bill pops up, you won’t need to go into more debt to cover the cost.
That said, while you are saving up, you also need to continue making the minimum payments on all your credit cards and installment loans. Unfortunately, if you don’t keep your accounts in good standing, it can harm your credit score and may eventually cause you more financial problems in the long run.
Should I save or pay off debt: A step-by-step guide
Now that you know the answer to whether it makes sense to save or pay down debt first, the next step is to learn how to do it. With that in mind, we’ve created a guide on this process below. Read it over so that you understand what steps to take to get your finances in better shape.
Create an emergency fund
The first step to improving your finances is to create an emergency fund. If you’re not sure how much to save, as a general rule of thumb, you should aim to save enough money to cover at least three to six months’ worth of expenses at any given time. Yet, that can feel like an overwhelming amount of money when you have debt piling up, so you may want to start with a smaller goal.
Whatever amount you choose for your emergency fund, it’s a good idea to keep the money in a separate bank account as you save. Having the money separated from your checking account will make it easier not to spend it on miscellaneous purchases. When in doubt, opening up a high-yield savings account is always a good choice.
Pay down your debts
Once you have a decent amount of money saved, the next step is to go about paying down your debts. Here, having a debt payoff strategy will be essential. However, most people end up following either the debt avalanche method or the debt snowball method.
With the debt avoidance method, you’ll focus on paying down your highest-interest debt first. The benefit of this method is that you’ll save money and interest charges over time. However, the downside is that it can take you a bit longer to see progress, especially if you’re paying down a big balance.
On the other hand, with the debt snowball method, you first focus on paying down your smallest balance. The theory behind this payoff plan is that if you give yourself a few small wins at the beginning of your payoff journey, you will be more likely to feel motivated to continue as you start paying down bigger balances. However, be aware that you will likely end up paying more in interest charges over time in exchange for that motivation.
Strike a balance between debt and savings
Finally, once you’ve established an emergency fund and have chosen a debt payoff plan, it’s a good idea to strike a balance between paying down debt and saving. To do that, you are going to need to make a budget. A budget will help clarify your spending habits and give you an idea of how much of your income you can afford to put toward your financial goals.
After your budget is in place, stick to it. Put the budgeted amount into your emergency fund each month and do the same with your debt payments. If you’re worried about getting side-tracked, consider setting up automatic payments that will help you automatically contribute to your emergency fund and your debts.
The bottom line on whether to pay off a credit card or save
The question of whether to pay off your debts or start saving is not a complicated one. You first need to save enough money to be able to cover an unexpected expense, and then you need to plan for how you intend to pay down your debts. Finally, you must learn to work towards both goals at the same time. Once you have those under control, you can start working towards other financial goals, such as buying a home or paying off your student loans.
As you work through the steps above, feel free to use this post to guide the process. After a while, if you work your plan, you should start to feel more in control of your finances and manage your debts. Still, if you don’t see the light at the end of the tunnel, contact us to see how we can help you with your debts.
Call us at (866) 890-7337, or fill out our short contact form to learn how settling your debt can help you start on the road towards becoming debt-free once and for all.