The Choice: Should You Save or Pay Off Debt?
A frequently asked question regarding finances is always surrounding the question, “Should I Work on Saving or Paying Off My Debt First?” and the answer is….Well, it depends!
If you’ve ever asked the above question, here are some tips which will help you with analyzing what may be best for you and the overall pros and cons with each decision.
SAVING VS. PAYING OFF DEBT
Here is a list of questions to ask yourself when deciding on whether you should save first or aggressively pay off debt:
1. How much months’ worth of emergency fund savings do I currently have? Do I have at least one months’ worth of expenses or do I have the typical standard amount of at least 3 – 6 months’ worth of expenses?
You can read more here about emergency fund savings
2. Am I comfortable with my current emergency fund savings total?
3. Can I cover an unexpected $1,000 expense?
4. Do I have the ability to save comfortably and still meet my basic needs?
If the answer to these questions is NO, you should not be aggressively paying off debt just yet. Key word, aggressively, meaning that you should still be focused on keeping your debts current by making the minimum required payments, but you are currently not able to apply additional funds towards paying off debt and you should be working towards saving up towards an emergency fund first.
There are some additional things to consider:
- You may need to decrease unnecessary expenses you do not value to begin saving and/or paying off debt
- Income is another important factor. Finding additional income through things such as temporary side hustles (I did this!) can assist you with accelerating these financial goals
MAKING YOUR DECISION
1. Figure out what is your total disposable income AKA your Lifestyle Gap. You need to calculate your base for your monthly income minus fixed and variable expenses to adequately analyze how much you would be able to put towards savings and/or debt
2. Decide how much emergency fund savings you are comfortable with as a starting point.
3. If you do have additional income to put towards savings or debt, you may want to calculate at least one month’s worth of monthly expenses or an amount you are comfortable with and save towards that goal first, prior to aggressively tackling debt. The reason for this is because saving towards a 3 – 6-month emergency fund can take a very long time, but having some emergency fund savings is extremely critical prior to embarking on a debt free journey
4. Consider a percentage (%) split between both goals if you would like to consider tackling both. For example: 70% towards savings and 30% towards debt
5. Paying off debt allows you to eventually provide yourself with a raise, because you will no longer be paying creditors from your income
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Ultimately, the decision is yours based on your financial goals and overall financial health. Be sure to consider all the pros and cons to choosing either choice, but also consider working towards both goals simultaneously or one at a time, whichever is financially feasible.
