Should I save, or should I pay off debt? This question has put many of us in a dilemma. While saving will prepare you for future emergencies, paying off debt will help you reduce the financial liability and stress of financial obligations. The point is that both are equally important to keep your finances in order. Though it is okay to be confused, you must find a solution that caters to both problems. But what is that solution? Does it even exist? We get it; you must have many questions in your mind. Every person has different priorities. The truth is that savings and paying off debt both should go hand in hand. One deciding factor is your current condition. So, let us figure out a solution one step at a time.
Here are the things you should consider while deciding to pay off debt or save for the future:
1. How much debt do you have?
2. What is the amount of interest that you are accruing every month?
3. How prepared are you to tackle an emergency?
4. Will you rely on your line of credit if an emergency occurs?
5. Finally, are you ready to control your impulse now for a bright financial future?
Situation 1: Too much debt with high-interest rates, you prefer to pay-off debt and not save:
In such a situation, paying off the debt must be your priority. You can make a debt pay-off strategy at your convenience. There are different debt pay-off strategies like the Avalanche method and Snowball method. In the avalanche method, you must first focus on repaying the debt with the highest interest rate while giving minimum due on other debts. Once you finish paying it off, you can move on to the next highest and so on. In the snowball method, list all your debts in increasing order, pay off the debt with the lowest amount first while making minimum due payment on others and then move on to the next one. Remember that paying off debts and not saving anything can put you in the debt trap if an emergency strikes.
Situation 2: You focus on saving for emergencies and put paying-off your debt on the back seat:
Yes, the saving will help you get through emergencies, but the downside of not repaying your debt is that you will accrue huge interest depending on your debt and creditor. Saving for an emergency means saving money worth 3-6 months of expenditure. Many people start using their credit cards during emergencies which increases the debt burden. When you plan to save money for an emergency and not repay your debts, your credit score also starts to take a hit.
Overall, focusing on one thing will put you in a dicey situation. It is essential to focus on both, though it might not be possible in some cases. Every case is unique; you might find different hurdles. It is crucial to take a holistic look at your finances before taking the next step. Before making the final decision, you should consider if you have a financial pillow to fall back on in case of emergency or what financial responsibilities you have and then make a sound decision.