Pablo Luna
An often-recurring financial question; does it really make sense to save when you have debt? Conversely, does it make sense to pay all of your disposable income toward the eradication of debt when you have no savings?
There are a number of different ways to look at this situation. However, when it comes down to it — when you’re trying to decide should you save or pay off debts — the answer is, it depends.
You Don’t Have an Emergency Fund?
Putting something away for a rainy day is always a smart play. If life in the age of COVID-19 has taught anyone anything, it’s that your finances can turn on a dime — through no fault of your own.
Look at all of the people who have been thrown out of work with no warning at all. Those who had some cash squirreled away for such a circumstance are far better off than those who did not.
Bottom line; always pay yourself first. Establishing an emergency fund of three to six months of your total monthly expenses could save you from going into debt if something disrupts your income.
You Do Have an Emergency Fund
The question now becomes, will your money serve you better when put toward eradicating debt or investing where it can grow and benefit your future?
In other words, what are the opportunity costs?
If your credit card debt has a very low-interest rate, or you have access to an employer 401(K) match, it might make more sense to maintain those bills as best you can, but keep putting that money away. In other words, if you’ll make more money investing than you’ll save paying off credit card bills, saving is once again the way to go.
Either way, you’ll have to run the numbers to see that for yourself.
Don’t just guess at it.
Are Your Debts “Toxic”?
High-interest credit card bills can eat up more of your money than you could earn by saving or investing it. With that said, you’ll still be better off establishing an emergency fund first. That way if something happens, you can deal with it in cash, rather than making that high-interest debt even worse.
On the other hand, if things are really bad and you don’t see how you’re ever going to pay that debt off, it might be a good idea to consider some form of credit card debt relief. This is true whether it’s a consolidation loan, a debt management program, or debt negotiation. Any of these can help you get that liability back in hand while preserving whatever money you have set aside for emergency situations.
How Much Time Do You Have?
If you’re older — getting close to retirement age — the smartest thing you can do is get rid of your debt. The last thing you want is to be on a fixed income and have to give money over to servicing debt as opposed to living a more comfortable life.
If you’re still early in your career and you’ve already run up considerable debt, you’ll likely want to try to do both, giving a little bit of preference to paying off your debt — assuming you already have an emergency fund to protect you should your employment situation go sideways.
Frankly, though, there is no clear-cut, definitive answer to whether you should save or pay off debts. The best thing you can do is take stock of your finances and your employment situation and choose accordingly. Now, with all of that said, the sooner you clear up that debt, the more money you will be able to keep for yourself.
