Paying off debt and saving money don’t need to be mutually exclusive, unless your finances don’t allow you to do both at the same time. Let’s look at when it’s beneficial to prioritize paying off debt and when you may want to consider starting or contributing to a savings account.
The decision to pay off debt or save money depends on your financial situation and what your budget allows. Make a budget that prioritizes bills and other essential monthly expenses, so you know how much wiggle room you have with your paychecks. What you have leftover is what you should use to either pay off debt or save.
If you don’t have enough left over, however, you may need to prioritize where you commit your money: paying off debt or saving.
Is it better to save or pay off debt?
Paying down debt over saving can be beneficial because you are paying interest as long as you carry the debt. Interest rates can allow your debt to grow out of control, even more so with high-interest debt. You should pay off high interest debt first to cut down on the amount of interest you will owe, which could allow you to put more into savings in the future.
Regardless of the interest rate, you should try to pay at least the minimum every month, or more if possible, to pay down the principal as quickly as possible. Since you’ll pay more in interest the longer you carry the debt, time is a factor that should be taken into consideration when paying down debt. Know how to pay down debt, and your options for doing so, before diving in.
Never put yourself in a position to worsen your financial health by missing payments altogether. If you don’t have enough money for your minimum payments and savings one month, prioritize paying off your debt first.
When to save before paying off debt
While you shouldn’t ignore paying off your debt, there are times you may want to consider prioritizing building your savings account, especially if you don’t have one. A savings account can help cover unexpected expenses, potentially even larger expenses such as a car repair. If you already have the money saved, you won’t be tempted to use your credit card to cover expenses you can’t afford.
An emergency fund may also be able to help you stay out of debt in the future by providing funds to cover unexpected bills. You can use your savings account as an emergency fund or have two separate accounts, setting aside one solely for emergencies. Even a small bill can contribute to credit card debt if you don’t have the extra funds to cover it, especially if you’re already in debt.
The best part is interest rates will work to your advantage within your savings account and emergency fund. Putting just a little bit of your paycheck in the right savings account can allow your money to grow, even during the months you can’t afford to contribute.
If you are struggling to make your minimum payments each month, you could benefit from professional debt relief. Contact a ClearOne Certified Debt Specialist at 866-481-1597 today to discuss your situation, explore your best debt relief options, and get a free savings estimate.