Paying debt and saving money are both very important financial goals. They’re also steps you have to take to reach a bigger life goal—living well during retirement. You may need to consider saving some while you pay down some of your debt simultaneously. Assess your financial situation and how you can tweak your savings and debt-payments to move your goals forward in each area.
Paying Your Debt
If you pay your debt first and put no money in savings, you’ll have nothing but credit cards to fall back on if you have a financial emergency. You can count on some type of expense coming, usually when you least expect it. Using credit cards to fund an emergency only makes it harder to pay off debt.
If you have credit cards with high interest rates, you may be able to pay debt down before saving. By reducing your owed balance, you’ll also reduce the dollar amount of interest you pay each month. This can give you a greater financial break than stock market gains, especially more than you’ll earn in a savings account. When it comes to fixed-payment loans (student loan, mortgage, etc.) extra payments can reduce the duration of your loan because your lender will apply the money to future payments.
If you save first and don’t pay down your debt, you will pay more money over time in credit card interest charges. Since credit card interest rates are often higher than savings interest rates, you end up spending more money on debt interest than you’d earn on your savings investment.
Only focusing on saving will risk entering retirement with debt, leaving you to either live on a strict budget or go back to work until you can pay off debt.
However, if you have debt with a low interest rate, you may be able to put most of your extra money into savings first, until you’ve filled up your emergency fund. This money can cover expenses like unexpected repairs that would otherwise be charged to your credit card.
The longer you wait to begin saving, the more you have to pay to reach your retirement goal. Saving earlier allows you to get the benefit of years and years of compound interest on your investment. If your employer offers to match contributions to your 401(k) plan, take advantage of that to increase retirement savings.
The Ideal Approach
Ultimately, it’s best to find a balance between the amount you spend on debt and savings each month and figure a way to split your money between the two that works best for you. It isn’t wise to put off either of these. It will be worth having the peace of mind that comes with having money in the bank to keep you out of the debt cycle and prepare you for your retirement years.