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If you want to maintain a healthy financial life, you must pay down debt and set aside money for emergencies. You may be wondering which one to prioritize. Understanding the advantages of both can help you develop a unique plan for managing your money and reaching goals.
Advantages of Paying off debt
Paying off loans with a high-interest rate can save you a lot of money.
Say you took out payday loans or credit card debt. These debts usually have a high APR. So, the smart move would be to pay off these debts as soon as possible. After clearing these debts, you can pay off other lower-interest loans like a mortgage, student loans, and car loans with regular payments.
You can improve your credit score by paying off existing debts.
Having a lot of debt affects your credit score. Savings accounts don’t show up on credit reports because there is no borrowing or debt linked to them. Your credit score is not affected by a savings account on your credit report. Clearing off your debts will help improve your credit score. A good credit score ensures you lower rates on mortgages and loans in the future.
Being debt-free makes you stress-free and gives you a better financial life.
It might seem like the most logical thing to do in your situation. If you have credit card debt, choose from the many options to reduce credit card debt. After you deal with your debt problems, focus on saving for emergencies to help you avoid more debts in the future.
Because of the wage gap, women make only 81% of what men make in the USA. Women have a more challenging time repaying their loans, and they have to pay more interest on their loans than men, making their debt grow over time. Make sure you have a good debt pay-off plan to ensure you have enough money to live a stress-free life.
Advantages of Saving Money
The earlier you start saving, the more you will grow your money with compounding interest.
Compound interest is the interest added to the principal sum of a deposit. It is better to start a savings account early to take advantage of compound interest. To keep up with inflation, start saving as soon as possible.
Saving first can be the better option for you if your debt has a low-interest rate.
It may be better to save first if you have debt with a low-interest rate on a credit card or another low-interest debt. While debts with lower interest rates, such as a mortgage, a car loan, and federal student loans, must still be paid on time, they may not be as urgent to pay down if you need to create an emergency fund. However, it is not advisable to ignore such debts and be current on them.
If your employer offers matching contributions to a 401(k), saving should be a priority
Saving should be a priority if your employer matches your 401(k) contributions. Usually, an employer matches between 3% and 6% of your pay. So, deposit an amount to get the maximum matching contribution from your employer.
If you don’t have enough emergency savings, it can further drive you towards debt.
A little money in savings can be a financial safety net. It’s an excellent way to deal with a medical emergency as you won’t have to swipe your high-interest credit cards or take out a loan.
According to the U.S. Census Bureau’s SIPP, only 22% of American women have about $100,000 compared to 30% of men. Also, compared to 47% of men, 50% of women have zero personal retirement savings. Women usually live longer than men, thereby living more years after retirement. So, you must take control of your financial situation as soon as possible. You can have a good life after you retire if you practice good budgeting and spending habits from now.
Conclusion
It might be better for your money if you took a more balanced approach. It would help if you focused on getting rid of your debt and building up your savings. You can pay off your debt and build up a small emergency fund when you do this.
The question of whether to pay off debt or save first: figure out if you have enough money to get through a financial emergency. For a month, keep track of what you spend. To figure out how much money you’ll need for things like rent or mortgage, grocery, clothes, gas, or, say, entertainment, you can do this: For three months, you should have enough money to cover these costs. Now, you can start thinking about ways to pay off your credit card debt. However, if you have a lot of debt, you should pay it off first before investing for a better return in the future.
AUTHOR BIO:
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.
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