Are you torn between building up your savings reserves or paying off debt? Saving money can give you peace of mind, knowing you’re covered in a financial emergency. But paying off debt can save you a bundle of interest and free up funds to help you meet financial goals faster.
Which option is best? It depends on your unique financial situation. Read on to learn more about the key benefits of each approach and why it could make sense to do both.
Understanding Your Financial Situation
Before we explore the benefits of paying off debt or saving money, grab a notebook and list all your debts. Also, note your savings balance and indicate if you have an adequate emergency fund. You should have 3-6 months of living expenses set aside for emergencies.
Next, examine your spending plan to determine how much disposable income you have. Can you make cuts to increase this amount so you can pay off debt faster, save money, or do both?
Also, consider your peace of mind and how it’s impacted by your financial health. Does the thought of lingering debt or having little to no money saved keep you up at night?
Ultimately, your financial situation will determine which goal to focus on. In the following sections, we’ll dive into the case for each approach.
The Case for Paying Off Debt
When you’re staring down the barrel of multiple debts, it might feel like you’re caught in a never-ending cycle. But tackling those balances can lead to serious wins for your wallet and mental health.
Getting rid of debt sooner rather than later means you’ll escape the minimum payment trap. Otherwise, it may hold your finances hostage for years to come. Plus, as the balances decrease, you’ll fork out less money in interest over time. And if we’re being honest, who doesn’t want to keep more of their hard-earned money?
One more thing: paying off debt is more than just crossing a monthly expense off your list of bills. It’s about having the freedom to decide where your money goes and living life on your own terms. That’s what financial freedom is all about.
The Case for Saving Money
Paying off debt is a no-brainer if you want to save a bundle in interest and create wiggle room in your budget. That said, stashing cash away is equally important to avoid piling on more debt.
Think about it this way: if money’s already tight and the unexpected happens, one of the following will happen:
• You’ll be forced to blow your budget
• You’ll resort to debt to fix the issue
That’s where an emergency fund could save the day by acting as a safety net when life catches you off guard.
Saving money does more than guard against unforeseen expenses. Knowing you have funds at hand is reassuring, which can reduce stress and give you peace of mind. Plus, a little thing called compound interest sweetens the pot. It's like a gift that keeps giving; your savings grow over time without extra effort.
Should You Do Both?
Still divided between the two options? Consider doing both at the same time to improve your financial health.
Allocate half of your disposable income to debt repayment and the other half to savings. It’s a safe bet that helps you make steady progress.
Yes, there’s always the drawback of paying more interest or not saving enough. However, working towards both goals can still help you achieve financial freedom. Ultimately, it’s about your sanity and what works for your financial situation.
The Bottom Line
You may be facing a tug-of-war between stashing cash away for a rainy day or clearing the slate of debt. If so, a financial coach can help assess your unique situation.
Remember, there’s no one-size-fits-all answer. Your chosen path should reflect your personal financial objectives and situation.
Trust your gut and consider your comfort with risk. Most importantly, make the decision that fills you with optimism about your future. Your wallet will thank you!
