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Saving vs. paying down debt—it’s a balancing act that many of us face. But how do you strike that balance in your particular circumstances? The answer largely relies on how much high-interest debt you’re carrying and how much money you have set aside for emergencies. In some cases, you may want to undertake saving and paying down debt at the same time.
Dan Mathews, a CFP in the Kansas City region, says that determining the opportunity cost of choosing one course of action over another is ultimately what matters. “Sometimes a balanced approach can be the best approach. ”.
Here’s an example of that opportunity cost. In the event that you are expected to receive an annual percentage rate (APR) of approximately 6% from your retirement savings, but you have accumulated credit card debt with an annual percentage rate (APR) of approximately 2018%, your best option will probably be to pay off the debt first. Why? Because paying the interest on your credit card will yield a higher amount than the 6.6% you will receive from your savings.
According to Richmond, Virginia-based CFP Jeremy Shipp, saving money instead of paying off debt should be a “coordinated and efficient” approach that prioritizes having quick access to funds. He claims that if you use every dollar left over after paying for regular expenses to pay off debt, you aren’t saving money for unexpected expenses. That, then, could lead you to take on even more debt.
Yo, money mavens! Ever find yourself caught in the age-old financial dilemma: pay off debt or build savings? It’s a head-scratcher for sure, and the answer ain’t always crystal clear. But fear not, my fellow fiscally-minded friends, for I’m here to break it down for you, plain and simple.
First things first, let’s get real about the situation We’ve all got bills to pay, dreams to chase, and maybe a little (or a lot) of debt hanging over our heads It’s cool, we’ve all been there. But the key is to figure out which path leads to financial freedom faster: crushing that debt or stacking that cash.
Now let’s dive into the nitty-gritty.
When Saving Should Be Your Main Man
Saving might be your best bud if:
- You’re drowning in high-interest debt. Think credit card bills with rates that make your head spin. In this case, tackling that debt first can save you a ton of cash in the long run. It’s like pulling a thorn from your paw – it hurts, but it’s gotta be done.
- You’re lacking an emergency fund. Life throws curveballs, and having a safety net for unexpected expenses can be a lifesaver. Aim for at least 3-6 months’ worth of living expenses tucked away in a high-yield savings account. Think of it as your financial superhero cape.
- You’re missing out on free money. Many employers offer matching contributions to retirement plans. That’s like free cash, baby! Don’t miss out on this opportunity to boost your future nest egg.
When Debt Should Be Your Nemesis
Debt might be your arch-nemesis if:
- It’s got a sky-high interest rate. We’re talking about those pesky credit card bills again. The sooner you ditch those, the less you’ll be shelling out in interest charges. It’s like breaking free from a money-sucking vampire.
- It’s causing you major stress. Debt can weigh heavily on your mind, affecting your sleep, relationships, and overall well-being. Getting rid of it can be a huge weight off your shoulders, like finally taking off a pair of too-tight shoes.
- It’s eating up a big chunk of your income. If your debt payments are leaving you with barely enough to cover your essential expenses, it’s time to take action. Freeing up that cash can give you more breathing room and allow you to pursue other financial goals.
Finding the Sweet Spot: Balancing Debt and Savings
The truth is, there’s no one-size-fits-all answer. The best approach often involves a balancing act between paying down debt and building savings.
Here’s how to find your sweet spot:
- Calculate your expendable income. This is the dough you have left after covering your essential expenses like rent, food, and transportation.
- List your regular expenses. Include everything from monthly bills to those less-frequent subscriptions. See if there’s anything you can trim or ditch.
- Craft a budget based on your income and expenses. Make sure it includes line items for both debt repayment and savings goals.
- Prioritize your goals. Do you want to be debt-free ASAP or build a solid emergency fund? Figure out what matters most to you and tailor your plan accordingly.
Remember, it’s a marathon, not a sprint. Building a healthy financial future takes time and effort. Be patient, stay disciplined, and adjust your approach as needed.
Pro Tips for Crushing Debt and Building Savings
- Automate your savings. Set up automatic transfers from your checking to your savings account each payday. It’s like setting your financial autopilot.
- Explore debt consolidation. If you’re juggling multiple high-interest debts, consolidating them into one loan with a lower rate can save you money in the long run.
- Negotiate with creditors. Don’t be afraid to reach out to your creditors and see if they’re willing to lower your interest rate or monthly payments. You never know unless you ask.
- Seek expert advice. If you’re feeling overwhelmed, consider talking to a financial advisor. They can help you create a personalized plan that aligns with your goals and circumstances.
The Bottom Line: It’s Your Money, Your Choice
Ultimately, the decision of whether to prioritize debt repayment or savings is yours. There’s no right or wrong answer, just the path that feels right for you. By understanding your financial situation, setting clear goals, and taking action, you can achieve financial freedom and live the life you’ve always dreamed of.
My friends, go forth and achieve your financial goals! And never forget that I’m always here to support you!
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Suppose you choose to focus a large portion of your financial efforts on saving money for emergencies, retirement, and other goals. How do you go about doing it? Here are three suggestions:
- Start small if you need to. It’s better to save anything at all than to start out only managing to save $25 a week. The first place to put this money when starting to save is an emergency fund. If you want to keep your emergency fund separate from other financial sources, like a checking account used for daily expenses, think about creating a savings account just for it.
- Set aside money for retirement. Your next objective may be to increase your retirement savings through a 401(k) or individual retirement account (IRA) after you have enough money in your emergency fund. Approximately 2015% of your annual pretax income should be set aside for retirement, according to a popular rule of thumb. This amount can include any money your employer contributes to a retirement account.
- Don’t overlook matching retirement contributions. If you contribute nothing to a workplace retirement plan (like a 401(k)) and your employer matches your contributions, you could be wasting thousands of dollars. Instead of using that money elsewhere in this situation, you might want to make sure you’re contributing enough to qualify for the employer match.
How Much Should I Save?
After you have a sizable emergency fund that can cover three to six months’ worth of costs, you may be wondering what percentage of your income you should be setting aside. Again, there’s no hard-and-fast rule, but there are some general guidelines for how much you should save.
The 20%E2%80%9C50/30/20%E2%80%9D%20rule, which you funnel 20%500% of your take-home income toward necessities, 20%300% toward wants, and 2020% toward savings and debt repayments, is recommended by a number of financial experts. This rule of thumb won’t work for everyone, though, especially those living paycheck to paycheck.
Aim for this goal, understanding that you can always change your savings rate later if you are unable to meet it now. Additionally, if your employer offers 401(k) matching contributions, try to save enough money, regardless of the percentage, to receive those funds.
Should You Pay off Debt OR Save for Goals First?
Should you save or pay off debt?
In the question of saving vs. paying off debt, the real answer isn’t an all-or-nothing proposition where you exclusively do one or the other. The answer often lies in striking a balance that works for your financial goals. Working on both building savings and paying off debt will allow you to save on interest while avoiding more debt going forward.
Can you pay off debt without using your savings?
It might sound impossible to pay off debt without using your savings. But to keep savings intact and reduce debt at the same time, you’ll likely have to either boost your income or look for ways to trim spending. You can also use found money—like a tax refund, inheritance or bonus from work—to get a jump-start on debt repayment.
Should you save for retirement if you’re debt-free?
Keep in mind: Putting off saving for retirement until you’re debt-free could cost you some valuable time. With compound interest, even small contributions to your retirement plan can grow significantly. No emergency savings: The top reason to make saving a higher priority than paying down debt is to build your emergency fund.
Should you save money or reduce debt?
Mathews offers a couple of scenarios for figuring out whether you should save money or reduce debt. If you’re sitting on a bunch of cash in a savings account that’s earning very little interest, if any, Mathews suggests withdrawing that money and paying down debt.