When you are in debt, loan repayment seems like a substantial financial priority, and it feels so hard deciding whether you should be saving or paying off debt. You are not alone in this predicament of whether you should save or pay off debt. It is a challenge that many of the population faces as paying off debt takes away your ability to save and vice versa.
Loans are overwhelming, and paying them off means having no money left over to add to your savings. You should be able to continue saving, even a little while paying down your debts. But the real answer to this question is finding the right balance between the two.
Save for Emergencies
The first thing you should work on is creating an emergency fund. Even though you might feel like paying off your loans as soon as possible, not having any emergency savings could lead to bigger problems in the future.
What happens if you run into unexpected accidents or emergencies and have no money saved up? You might lose your job or have to pay for medical expenses. And in these times, if you don’t have an emergency fund saved up, it could end in you being even deeper in debt.
You would have to take out another personal loan or use high-interest credit cards, which will pile more debt on your shoulders. With no savings, the only option available to you is going deeper into debt to deal with emergencies.
Consider the Opportunity Costs
Once you have a good emergency fund, about three to four months’ worth of money saved up, you can start paying off your debts. Now, you have to consider the opportunity costs of saving and paying off debt.
To better understand opportunity cost, here is an example. You might have a credit card debt with an interest rate of around 15%, and your savings account might be earning you a return of 5%. If this is the case, you should probably pay off your credit card loan first. Paying off your 15% card debt will cancel out your 5% interest earning altogether.
Generally, you can keep saving while having debt as long as you can stay on top of your loan repayments. If you are keeping up with your mortgage, your credit cards, and any other loan commitments, and if your loan repayments aren’t costing you more than the interest you earn on your savings, you can continue saving while remaining in debt.
Get Rid of High-Interest Debt First
If you have an emergency fund saved up, pay off high-interest debts first. Payday loans, credit cards, car titles, and anything with a high-interest rate should be your primary focus. These high-interest rates can completely ruin your budget and financial plans and keep you stuck in debt for long periods. Consider getting rid of these debts before your mortgages or student loans. The higher the interest rate, the higher the repayment priority should be.
Final Thoughts on Saving or Paying Off Debt
Not everyone is in the same situation. You need to put your situation into perspective and decide for yourself whether you should save or pay off debt.
If you think your job isn’t secure, you should probably have an emergency fund ready before you think about repaying your debts. Are you behind on any loan repayments? If you are behind on any loan repayments, you should catch up on those loans before saving up. Being behind on loans will only make it harder to repay them down the line.
You need to find a balance that works. Consider your situation thoroughly, make a plan, and stick to it. After you have an emergency fund established, you should pay off high-interest loans first while adding small amounts into your savings. You can start saving more boldly once you have repaid high-interest debts.
