Pay off Debt or Put Money into Savings?

How to Balance Your Money Best + Figuring Out What’s Right for Your Personal Situation

By

Matt Lyons

on

Jan 21, 2021

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Debt is a financial burden that many people face at one point or another, with over 300 million Americans carrying some form of debt. Debt can make it much more difficult to manage your other expenses/finances, including savings. While paying off debt should be a priority for lots of people, it’s not the only thing you should be focusing on. If you spend too much money towards those debts right away, you might not have enough to put towards your savings. Even if you’re in a situation where you need to focus on debt over savings or vice versa, you should try and keep at least somewhat of a balance between the two if possible. 

Emergency Savings

It’s always best to prepare for the unexpected, and an emergency savings account can help cover some expenses that may arise. It’s recommended that an emergency fund should contain at least three months’ worth of your take home pay, but when it comes down to it any amount will help when the unexpected strikes. 

How to Build a Savings Fund

When you put away money into your savings fund on a regular basis, you will start to see it grow in no time! You can work to build up your savings fund by following steps like these:

  • Set goals: Setting goals for your savings will help keep you motivated and on track for where you’re trying to get to. You might end up working harder to make some more money to put into your savings.
  • Create a plan: You have the option of setting up automatic recurring transfers into your savings account. This way, you’ll know how much money is needed on the exact pay date. Over time, you can start to add in more money and your savings account will continue to flourish. 
  • Open a high interest savings account: A high interest savings account is most ideal for many, because the compounding interest will allow for your savings to grow even more. 

Other options of where to keep an emergency fund can include:

  • Bank or credit union account: One of the most common and safe options is to go with a trusted bank or credit union.
  • Prepaid card: A prepaid card is used to load money onto. You won’t have to worry about dealing with a bank, and you can only use up the amount that you put onto the card. 
  • Cash: You could also keep your savings in cash to have that money on hand in case of an emergency. However, it’s important to remember that cash can be very risky to handle especially when dealing with a lot. Oftentimes cash becomes lost or stolen. 

Without any type of savings, you may feel tempted to use your own credit cards or get a loan when an emergency happens. This will only put you in more debt, and if the habit continues your finances will soon become a much bigger burden.

How to Save Your Money

If you’re looking for more ways to budget, consider the 50/30/20 method. With this method, your income will be divided into three main categories. These categories include 50% for needs, 30% for wants, and 20% for savings or paying off debt. Through this method, you can split the 20% in half and do 10% savings and 10% paying off debt.

Needs can include:

  • Rent
  • Transportation 
  • Loan payments
  • Electric/Gas Bills

Wants can include:

  • Shopping
  • Eating out
  • Buying Clothes 
  • Various subscriptions like Hulu, Netflix, and more

Paying Off Debt

There are various kinds of debt, with some that might be harder to get rid of than others. High interest debt, like credit card debt, should be made a priority to get paid as quickly as possible. Ultimately, the faster you pay off debt will result in a smaller amount you will have to pay in interest over time. Getting rid of debt can also help to improve a credit score. Less debt results in a lower credit utilization ratio, which is what will ultimately help raise a score. 

There are a couple strategies you can use to help get debt repaid. These strategies can include:

  • Snowball method: List your debts from smallest to largest. Start by paying off the smallest ones, and work your way up to the most expensive ones at the top of the list. This method is more psychological based, getting rid of those smaller debts initially and feeling less of an emotional burden overall. 
  • Avalanche method: Loans are ranked based on interest rates versus the total amount of money owed. As mentioned previously, high interest debts should always be a main focus to pay as soon as possible to limit the amount you’ll end up paying in interest. 
  • Look at low/no interest options: You can refinance your student loans to receive a lower interest rate, with rates of least 8% being the most preferred for refinancing. You can also take on a 0% balance transfer offer on credit card debt with high interest. 
  • Look through your expenses each month: Referring back to the 50/30/20 method, are there any of those “wants” that you might want to get rid of to save a little bit more money? Maybe try and reduce some of those monthly subscriptions or take a little bit less shopping trips!

You Can Do it All!

While you should always try and get rid of any debt as soon as possible, it’s important not to forget your long term financial goals and short term needs when it comes to savings. Continue to work on ways to save and manage your money to help you balance the two finances.

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