Better to Save money or pay off debt ?

When my husband and I started taking our finances seriously; whether to save money or pay off debt was the first significant decision we had to endure. We were fortunate enough to have a good job and earn good money. But, the responsibilities of extended family and their unreasonable demands were constantly putting us in more and more debt irrespective of good earnings. We were living paycheck to paycheck, making minimum payments on debts, and finding new ways to borrow money to meet our expenses. We had ZERO savings to survive if one of us lost our job.

But there is a silver lining to this horrible situation. This disgusting situation forced us to make some tough decisions in life and got us on the track of financial literacy.

Money management has always been a tricky task for many individuals.

If you’re fortunate enough to have an income that exceeds your bills, figuring out how to put that positive cash flow to good use can be confusing. Is it better to pay off your debt or put it into savings? How to decide which choice is the most beneficial and will provide the best long-term outcome. 

Deciding whether to save or pay off debt can be determined by examining a few critical factors. 

Making an informed decision can have a profound effect on your finances.

Go through the remaining article and check yourself which solution is best suited to your individual financial circumstances.

Ask yourself these questions to determine how best to utilize your extra cash:

Do I have an emergency fund? 

Putting away some money is an excellent first step if you don’t have any savings. Even with high-interest debt, creating an emergency account before attacking your debt will provide excellent financial stability. You’ll sleep better at night, too.

Saving a few months’ worth of expenses is enough for most families.

How risky is my source of income? 

Have you worked for the same company for 15+ years and expect to work for 15 more? Or is your company struggling? Do you have issues getting along with your new boss?

A stable income favors paying down debt, whereas less stable employment tips the scales in favor of saving.

What rate of return do I receive on my investments? 

Knowing whether to save or pay off your debt largely depends on your investment returns. Can you earn a better rate on your investments than you’re paying on your debts?

What is the interest rate on my debt? 

Your credit card interest rate might be 19% or more. No one, not even Warren Buffett, can routinely achieve that kind of return through investing. 

If your emergency fund were in place, paying on your high-interest debt would make sense. 

Paying a 15% debt is similar to earning a 15% return.

If you consistently make 8% on your investments, paying extra toward any debt with an interest rate of less than 8% wouldn’t make much financial sense. You could pay the minimum on your debt and invest the rest.

Any debt with an interest rate above your investment return is a candidate for your extra cash.

What is the current rate for a savings account? 

If you’re not an investor yet, what rate of return could you expect with a savings or similar account? It’s probably considerably less than the interest rate of any debt you have.

What are my financial goals? 

If you’re nearing retirement and already have plenty of money set aside, get busy eliminating your debt! However, saving might be more reasonable if you send your child to college next year.

 What are your goals, and how will this decision impact them?

What’s most important to me? 

Think about which option puts your mind at ease. For some, stockpiling money in the bank is very soothing. For others, being debt-free feels better. Avoid ignoring the emotions surrounding your financial decisions.

If the return on your investments and the interest rate on your debt are similar, the difference will be minimal. 

Being relaxed and comfortable with your finances is essential.

Paying down debt and saving are both worthwhile options for your extra cash. Either choice is better than spending it! 

The possibility that’s better for you will depend on your individual circumstances. 

If all else fails, consider doing both simultaneously. Save a little and apply a little toward your debt. For many, this can be the best of both worlds.

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