When you’ve got menacing debt and a savings account with singing crickets, you may find yourself in the middle of a tug-a-war. It’s easy to be at odds with yourself, asking the popular question: should I save or pay off debt?
Unfortunately, finding the answer isn’t so black and white. There are a lot of factors that come into play, but we’re about to break them down!
Paying off debt before saving money
Sometimes it just makes sense to start slashing through debt before stacking your coins, especially when you’re dealing with high interest rate debts. Simply put, when you’re earning less in a savings account than what you’re paying in interest then you’re actually losing money.
For example, let’s say you’re focused on saving money for the next two years and your savings account has a 1% APY. On a $10,000 balance you’re only earning about $200 over a 24-month period. If you carry a $10,000 debt balance with a 4% interest rate, you’re paying roughly $422 in interest. That’s a $200 loss!
Paying off debt doesn’t just involve numbers, there are psychological factors to consider as well. Every time you check your debt totals you may start to feel anxious, stressed, and ashamed. These feelings can trigger irrational decisions, like making a large payment that you really couldn’t afford to make (been there done that)!
Waiting for balances to drop is agonizing, but by starting with debt first, you get the satisfaction of reducing the amount you owe which calms that anxious itch to take action immediately.
Tips for paying off high-interest debt:
Transfer the balance to a 0% intro APR card. Paying off debt with a high interest rate is brutal. Your payment is gobbled up by interest charges first, and whatever scraps are left over go to the principal balance (the amount you originally owed).
By transferring your balances to a card with an introductory APR of 0%, your full payment is going to the principal thus helping your knock out debt a lot faster! Check out how to use a 0% intro APR card to your advantage here!
Pay more than just the minimum. As Beyoncé says, go ape! Ape as in intensely paying off your highest interest-rate balance. This may not be the tip you want to hear, because it takes a lot of hard work and dedication, but it’s definitely one that you need to hear.
A high interest rate can easily suck the sanity from your soul because no matter how many of those minimum payments you make, that sucker is barely going to budge! It can feel like you’re throwing your money down a dark well just for the heck of it, and you’re in for a lengthy journey.
Allocating as much money as possible to get debt paid off quickly is key to saving yourself thousands in the long run and shortening the time it takes to zero it out.
The ugly side of paying off debt first
Not establishing a proper emergency fund can send you down a slippery slope into even more debt or it can stall your debt payoff process altogether. When something unexpected arises and you have nothing saved, you’ll be forced to run up credit cards, take out loans, borrow from loved ones, etc. You may even wind up having to halt your debt payoff in order to pay on the expense which means all of your hard work just went down the drain.
More money posts to check out next!
- 7 Tips to Improve Your Credit Score 100 Points in One Year
- The Debt Snowball vs Avalanche. Which is Right for You?
- The Simple Trick to Paying off Credit Card Debt Fast!
- The “Broke” Girl’s Guide to Saving Money
- How to Pay off Thousands in Debt as a Single Mom. Yes, Even on a Low Income!
- How I Went from $100 to $1300 in Spendable Income – Stop Living Paycheck to Paycheck!
- How I Paid Off $16,000 in Debt on One Income. You Can Too!
- Senseless Spending Making You Broke? Try These 8 Tips!
Saving money before paying off debt
Choosing to save first allows you to have a blanket of security because you’re financially prepared to tackle an unexpected expense head-on. This way, whatever rock life throws at your window won’t interfere with your other financial obligations or cause you to put yourself into more debt.
It’s recommended to have at least $1,000 saved in a starter emergency fund before moving on to saving 3-6 months’ worth of your living expenses. Here are some tips to help you jump-start your emergency fund:
Cut and/or reduce your expenses. Comb through your budget to find non-essential expenses that can be cut and/or reduced. This includes subscriptions, membership fees, eating out, phone plans, etc.
To determine where the majority of your money is running off to, I recommend looking over your bank statements to track your spending. The quicker you identify money leaks the quicker you can stop them before they cause devastating effects.
Earn extra money. A side hustle is a way in which you earn extra money on the side (duh) consistently or for a short period of time. It’s like the side-piece to your main source of income, and the possibilities are endless. If you have a passion or interest, determine how you can turn that into a profit. Here are 10 easy ways you can start earning extra money from home!
The ugly side of saving money first
Saving money instead of paying off debt means that those annoying debt balances will be breathing harder on the back of your neck because they’ve been put on the back-burner. You have to be able to see the big picture to ward off those anxious, impulsive cravings to get rid the mess you made.
Also, choosing to make paying debt less of a priority can cause you to be eaten alive by interest. As mentioned before, carrying debts with high-interest rates can cost you more than what you’re saving.
So, should you save or pay off debt?
It depends on your financial situation and behavior. Good thing is, this is your own personal journey so you get to decide what moves you make and when.
If you carry low interest rate debts then saving money to increase financial security first may make more sense to you, especially when there are cobwebs in your account. I highly recommend you take my free 5-day savings course if you need a little extra help with saving!
If you’re drowning in your debt and have at least $1,000 saved then diving straight into paying it off may make more sense. I also have a free 5-day email course where I give you the strategies that have helped me pay off $16.5K in 2.5 years on one income that you can enroll in here.
Neither one sounding like a good move? Then why not do both?! Personally, I don’t really play by all of the rules so I found a healthy balance between saving and paying off debt at the same time. This way, I get the satisfaction of watching my balances drop while also having the peace of mind that if something goes haywire that I have money set aside to help CYA!
So tell me, which route makes more sense for you?