Needing to pay down debt while also saving money often feels like a "chicken or the egg" problem. Which comes first? It can be tough to choose between saving for a fun mid-summer getaway or tackling the lingering credit card debt that's still hanging around from the holidays. Here's how you can decide whether to focus on paying off debt or saving money this summer.
Should I Pay Off Debt Before I Start Saving Money?
If you're holding onto debt, especially high-interest debt, it can be hard to see past the interest building up. Paying off debt makes sense before starting to save money in certain situations, including:
- When you have high-interest debt: Credit cards and certain high-interest loans can end up costing you a lot of money when the interest accumulates. If you're only making minimum payments in favor of saving money, you may end up tacking on more in interest each month. High-interest debt is typically enemy number one in any financial strategy and should be the focus before you start to save.
- When your emergency fund is situated: If you're comfortable with the amount of money you have for emergencies, debt payoff should take a front seat. If you haven't yet started your emergency fund or don't have enough saved up, that's a great place to focus your efforts on first.
Should I Save Money Before I Start Paying Off Debt?
For many people, saving might feel more important for financial security than worrying about debt. Prioritizing saving over paying off your debt makes sense in a few situations, including:
- When you have no emergency buffer: Setting up an emergency fund is often the first step for those who are new to financial management. And that's because doing so can provide a buffer for you to take on other goals, like aggressive debt payoff. Failure to create an emergency fund could put you in a place where taking on more debt is required if an emergency comes up.
- When your debt is low-interest: Debt like a mortgage or car payment with a low interest rate isn't as critical to repay quickly as high-interest debt.
- When you have access to a retirement plan with an employer match: Failure to participate in an employer-sponsored retirement plan with a match is like tossing out free money. You should do whatever you can to contribute to your match point, whether it's a percentage of income or a fixed dollar amount.
A Winning Combination
Sometimes the right option is to simultaneously focus on paying off debt and saving money. When you create your budget, see if you can find a number that fits to funnel money into savings while putting a similar amount towards debt. Plus, you might feel more confident if you see the amount of debt decrease while also seeing your savings build.
The Bottom Line
For many people, striking a balance of debt paydown and saving can be an ideal strategy. As a rule of thumb, setting up emergency savings and paying off high-interest debt should take priority. Depending on your unique financial situation, you'll need to decide which strategy will have the most impact on your bottom line this summer.
Notice: Information provided in this article is for information purposes only. Consult your financial advisor about your financial circumstances.
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Original Source: Should I Pay Off Debt or Save Money This Summer?
