What Should I do first – Pay off Debt or Start Saving Money?
There’s a lot of advice out there when it comes to managing your money. Only spend what you have. Don’t max out your credit cards. Put 10 percent of your paycheck in savings. Be sure to have at least six months of income in savings in case you lose your job or are forced to take a temporary leave.
This is all good advice, but for so many people barely making ends meet, it’s not always practical. You just want to know how to get that debt paid off as fast as possible and find out how to start saving money. The question is, do you pay off the debt first or start saving money first? If you can do both at the same time, that’s the ideal scenario. If you have to choose (and so many of us do these days), there are a few things to consider before making that decision.
1. Look at interest rates
There is a very good chance that any loan you have will incur more interest than you are earning on your savings in today’s economic climate. If your loan interest rate is a lot higher than your savings rate, work on paying down your debt first. If you can apply extra money to your monthly payments, you will pay off your debt faster.
2. Do you have an emergency fund?
As we mention above, financial experts recommend keeping the equivalent of six months of salary in a savings account. That is a great idea, but it still takes six months to earn that money. It will take even longer to build up that emergency fund. In the meantime, shoot for a $1,000 emergency fund. How do you find that extra money? Believe it or not, refinancing your auto loan or mortgage could save you hundreds of dollars a month. If you eat out frequently, cut that in half and apply the money you save to your emergency fund. Look at your checking account to see where you spend the most money and see if you can cut back until you have that emergency fund established. If you need money to cover a deductible on health or auto insurance claims, pay for car repairs, etc., this fund will keep you from adding more money to the debt you have been trying to pay off.
3. Can you consolidate your debt?
Lots of us have more than one loan/credit card. If you consolidate them all into one loan with a much lower rate, that could lower your monthly payment or let you keep the same payment but pay off your debt faster. Personal loans and home equity loans are often good solutions, depending on your level of debt.
Should you save first or eliminate debt first? That answer depends on what you already have in place. Take a look at your budget, consider the questions above and carefully decide what makes the most sense for your situation. Of course, your friends at Heart are happy to assist with these questions, as well.