Should I Save or Pay Down Debt?

Credit cardsA common question, especially when one is saddled with debt, is “is it better to save or to pay off debt”? While the short answer to this is “both”, there are complexities as well as individual circumstances to consider.

Not an All or Nothing Proposition

While the focus should always be on living as debt-free as possible, having available savings (especially when it comes to an emergency) plays a vital role in keeping your financial health in balance.

Also, if you were to devote all of your funds in support of saving for a rainy day, then your debt load will swell quietly, as the clock ticks while interest accumulates, effectively making you pay more over time for the same amount of money.

What’s Your Plan?

First of all, you need to consider your entire financial picture. In order to have an accurate idea of what your financial picture looks like, you need to have a very specific plan that addresses short, medium and long term goals.

What are your goals? Perhaps you are saving to buy a home or a big ticket item? How much thought have you given to retirement planning (which even though may be a ways off, requires attention in the present day)? Are you fresh out of school and trying to erase that student debt?

All of these items have a place in planning, and need to be expressed and assigned levels of priority.

Goodbye High Interest

While owning money instead of owing money is the objective, not all debt is equal. You should start by focusing on high-bearing interest, revolving debt- usually credit cards. Some department store credit cards carry enormous interest rates (in the area of 30 percent) meaning that if you only make your minimum payments, you will have a hard time eroding the block of the debt.

Pay Debt Wisely

In the same vein, if you are paying little bits on lots of things, you are not going to make headway to paying down debt with any sort of speed.

Consider consolidating debts into one payment, which will more aggressively attack your debt, as well as free up cash flow. The extra cash can go into savings, or towards monthly expenses, so that you don’t have to use credit for future purchases.

Time Value

Time really does matter when saving, so even though retirements (and your more immediate saving goals) seem in the distant future, it is well worth beginning now.

Simply put, money invested today and accumulating return over the years will have more earning power than if you were to wait and put the same amount of money in years from now. Your balance grows because of the return on the investment, which is supported by time.

Saving is best accomplished if it is seamless. See about setting up an automatic deduction from your pay, and you won’t even miss it– but this money will be hard at work for you behind the scenes.

It’s All about Balance

Like so many other quandaries that face us in our daily lives, the answer to this one is all about balance.

Debt or savings? If you plan appropriately you can do both.