Consider your present financial condition when deciding between which one to do: pay off debt vs saving money.
Saving money for the future often gives you the impression that you’re in control of your finances. However, paying off debt feels like a big chore and may give less satisfaction even though you’re just chipping off pieces of a shrinking bill.
So, it’s understandable why most people save instead of paying off debts. However, that may not always be the right thing to do.
So, which should you go for; paying off debt vs saving money?
A general financial rule is to pay off debts instead of saving. Most credit cards have a high-interest rate, up to 22%. Personal loan rates are way cheaper, with some as low as 4-5%.
Also, the rate you’re paying on your loans may be higher than what you earn on savings. The average rate on a savings account is around 2%. So while paying money into your savings account may seem fulfilling, know that you’re paying more interest on your debts than shat you earn on your saving.
Should You Always Repay Debt?
While it is advisable to pay debts off, there are always exceptions to the rule. You can delay paying off debts for the following type of loans:
Low-Interest Loans
There are loans where the interest rate is lower than the rate on savings. For instance, if you have a low-interest or interest-free loan, it may make more sense to save.
So long as you have sufficient money to clear the debt before interest kicks in, you can take advantage of the interest-free borrowing fit as long as you want.
Other cases exist where paying off debt and saving at the same time may sound more reasonable, especially if the debts are cheap and you’ve struck a balance between the two.
The idea is to get rid of more expensive debts like credit card debts, as they would only grow more expensive the longer you leave them to grow.
Student Loans
Another exception to paying off debt immediately is student loans. They work differently from other loans as their repayment is not linked to the amount you owe but to your earnings or monthly income.
Also, they structure student loans so that most people end up not completely paying them off. If you have better things to do, like saving towards a financial goal, you can put your energy into that and return to paying off your student loans.
Why Should You Save For An Emergency Fund?
Although it’s advised you pay debts over saving, there’s another school of thought that says you should save for an emergency.
Experts recommend keeping aside three to six months’ worth of salary in an easy-to-access account. It’s supposed to be an emergency fund that caters to surprises and unexpected expenses.
Most advise that emergency savings should cover paying off credit card debts, and after that, one should start new savings. Then a credit card could come in handy for emergency expenses. Signing up for a new card may get a 0% interest deal.
However, not having a financial safety net is not excellent advice and a situation anyone should be comfortable with.
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Which Debts Should You Pay First?
Except for a few exceptions, the rule is to pay off debts first. Also, when it comes to debts, the rule is to pay off the most expensive debt first. This is often listed based on their interest level rates, and they include the following:
- Overdrafts
- Credit Cards
- Store cards
- Personal loans
Some debts may be flexible with the amount they repay each month. So, for example, credit cards have a minimum amount payable each month, but that doesn’t mean you should use them. The longer you pay off your debt, the more expensive it becomes.
Here’s a rule of thumb for clearing your debt. Ensure you have sufficient money to cover your monthly expenses. This is to ensure you refrain from borrowing again on top of debts. A budget can help.
Pay Off Debt vs Saving Money In An Emergency Fund
Suppose you don’t have an emergency fund; set aside a certain amount of money from your take-home pay in a designated account. An emergency fund would help cover unexpected financial charges and expenses.
Paying off debt (e.g., credit card debt) is not an ideal substitute for an emergency fund, as the credit card company can reduce your credit limit, leaving you stranded.
The Bottom Line on Pay Off Debt vs Saving Money
Consider your present financial condition when deciding between which one to do: pay off debt vs saving money. This will also include asking yourself if you have a reliable person to lean on if you cannot sort out unexpected expenses.
Starting with paying off debt may be ideal if it’s a high-interest loan. Also, setting money aside in emergency savings can create a balance and ensure you’re not stranded in an emergency.
Consider working with a financial planner to help you with a comprehensive solution if you need more clarification on what to do.
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