Should I Pay Off Debt or Save?
There are varying views on whether it’s better to pay off debt or save money first when planning your financial goals. We’ve gone through the pros and cons from financial advisers and broken them down for you here.
Everyone’s situation and goals are different, so it’s important to decide for yourself what your top priorities are right now.
Saving FirstMany experts teach that having an emergency fund with up to 6 months of expenses should be the top priority when making a savings plan. Having money stored away for a rainy day gives you security and could prevent a tough situation if you find yourself needing extra cash.
A 2017 study shows that 78% of Americans are living paycheck to paycheck and nearly 56% are saving less than $100 per month. Without an emergency fund, you could find yourself in more debt when unexpected expenses inevitably pop up.
“Putting off saving for retirement until you are debt-free could cost you your most valuable asset: time.” - Amy Fontinelle, Bankrate Another point to consider when deciding on saving versus paying down debt is planning for retirement. If you work for a company that offers to match your contribution to your 401K, most experts advise paying the maximum percentage to put yourself in a great position in the future.
Paying Down Debt FirstWhile a good number of financial advisors recommend at least starting an emergency fund before paying down debt, others have a different viewpoint. Depending on the interest rates on your debt, paying off your debt first might be wiser in the long run.
“You must make minimum debt payments before allocating money toward any other goal, including saving an emergency fund or investing for retirement. This is true even if you have to forego an employer match in your 401(k) because you don't have enough to both invest and pay debt.” - Christy Bieber, The Motley Fool
Making minimum payments on your debts is important because you not only risk paying more in the long run, but you also run the risk of damaging your credit score. Take a look at the debt you have with the highest interest rates: if the rate is over 8%, consider paying this debt down first.
Dave Ramsey had this to say to a caller who has over 49K in savings with 60K in debt…
“Were you to start our classes and do the things we teach — be on a written budget, carefully managing your money and making it behave, cutting up your credit cards and all that stuff — we would take everything out of your family savings except for $1,000 to throw at this debt.” - Dave Ramsey
In fact, growing student loan debt has such a measurable impact on young people's savings that many recent college graduates may not be able to retire until they are 75 years old. While saving as early as possible is important, it's also important to pay down your student loan debt as soon as possible. The experts over at LendEdu suggest paying more than the minimum as often as you can, and to send any financial windfalls (like a bonus or a tax return) straight to your student loan to take a big chunk out of that debt.
Whether you decide that saving or paying down debt is the first priority for you, it’s important to note that you should definitely avoid adding unnecessary debt. Try just using one credit card with a low-interest rate and maintain a manageable balance to move you down the path of financial freedom.
Weigh in, has saving or paying down debt worked best for your financial goals? One way to cut back on monthly bills is with a fair, simple monthly phone bill. At Republic Wireless we have cell phones plans starting at just $15/mo. Click the button below to learn more.