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Two important parts of a strong financial base are having savings and not having any debt. But which is more important? That depends on your situation. Here are the pros and cons of putting savings ahead of paying off debt.
The Case for Savings
Having emergency savings is very important in case of sudden costs like medical bills, car repairs, or losing your job. If you don’t save enough, you might have to use credit cards or loans in an emergency, which could put you in more debt and cause you stress about money.
Even a small starter emergency fund of $500 can help break the debt cycle. From there, aim to save at least 3-6 months’ worth of living expenses. Make savings automatic by setting up direct deposit into a high-yield savings account.
Retirement savings are also important. If your employer offers a 401(k) match, contribute at least enough to get the full match – it’s free money you don’t want to miss out on. Time and compound interest are your biggest assets when saving for retirement, so start as early as possible.
The Case for Paying Off Debt
High-interest debt like credit cards can snowball quickly if left unchecked. By focusing on repayment, you reduce the amount you pay in interest over time. This frees up money in your budget for other goals like saving and investing.
Paying off debt also leads to better credit utilization, which may boost your credit score This opens the door to better loan rates and terms in the future
Psychologically becoming debt-free can provide peace of mind and reduce financial stress. Just be sure to have a small emergency cushion first so you don’t go back into debt to cover unexpected costs.
Finding the Right Balance
In the end, saving money and paying off debt are both important parts of a good financial plan. Here are some tips to balance the two:
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Build at least a small starter emergency fund before aggressively paying off debt. Aim for $500, then grow it over time.
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Contribute enough to your 401(k) to get any employer match. It’s free money on the table.
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Make a budget with savings goals and debt repayment targets. Automate transfers to help reach them.
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Attack high-interest debts first using strategies like the debt avalanche or snowball methods.
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As debts are paid off, redirect funds to increase emergency savings and retirement contributions.
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Review your progress regularly and make adjustments as needed based on your evolving situation.
The right approach depends on factors like your income, expenses, interest rates and job stability. There’s no one-size-fits-all solution. The key is being intentional about both short-term security and long-term goals.
With smart strategies and discipline, you can build savings and enjoy a debt-free lifestyle. The journey takes time, but each small step moves you closer to financial freedom. Reach out to a financial advisor if you need guidance finding the right balance for your situation.
In Closing
It’s a common dilemma – pay off debt or save? The answer is to find the right mix of both. Savings provide stability and options, while repaying debt reduces costly interest and frees up money. Review your finances regularly and adjust your approach as needed. With patience and a plan, you can achieve savings and debt-free living.
Bankrate’s insights on credit card debt and savings plans Money Bag Icon
- Only 44% of Americans would pay for an unexpected expense of $1,000 or more from their savings, according to Bankrate’s Emergency Savings Report.
- 36% of people say their credit card debt is higher than the amount in their emergency savings, according to the same report.
- When asked what’s a higher priority at the moment, 25% of U.S. adults surveyed said paying down debt, 28% said increasing emergency savings and 36% said focusing on both at the same time, according to Bankrate’s Emergency Savings Report.
- Of U.S. adults who have emergency savings at all, 59% said they’re uncomfortable with how much they have in emergency savings.
- When asked the minimum amount of emergency savings it would take to feel comfortable, 89% of people responded they’d need enough to cover three months of expenses, according to Bankrate’s Emergency Savings Report.
How much should I save?
Experts recommend building an emergency fund of three to six months’ worth of expenses and stashing it in a high-yield savings account. Some even recommend putting enough cash in the bank to be able to pay your expenses for an entire year.
But you have to start somewhere. Aaron Graham, a tax planner with Holistiplan, suggests starting first with a goal to cover a single month’s expenses.
“There is no excuse for not saving for these emergencies,” Graham says. “It’s not a question of if they will happen, but when; plan accordingly.”
In the process of establishing emergency savings, it’s important to store those funds in a savings account that’s convenient and earns a competitive interest rate. Finding a top-yielding savings account means you’re getting more money in return on your savings.
Building up your emergency fund often goes hand in hand with creating and following a budget. In addition to incorporating line items into your budget for things like mortgage or rent, utilities, transportation and groceries, include line items for dollars you’ll devote to savings each month. Examples include an emergency fund, a down payment on a home or a car, or a vacation fund.
Pay Off Debt or Save Money?
FAQ
Is it better to pay off debt or keep savings?
If you don’t have emergency funds, it might be smarter to save your money than to pay off your debt. You might have to use a credit card when you need to pay for something unexpected if you don’t have an emergency fund. This will put you in even more debt.
Is there a downside to paying off debt?
Less discretionary spending money Whether you’re paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget.
Is it good to be completely debt free?
How so? A debt-free life translates to a lower credit utilization ratio, which can work wonders for credit health.
At what age should you be debt free?
“Shark Tank investor Kevin O’Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Feb 25, 2024.