Is it better to save money or to pay off your debt? Ideally, you do both. But which one do you do first? It can be very frustrating if you do not have a ton of income and you have quite a few expenses. You may feel like you are barely making a dent in your debt and your savings is growing at a pathetically small rate.
The obvious route might be to plug away all of your extra money into your paying down your debt. Once your debt is paid off then start bumping up that savings account.
While this is a great strategy, it might not work for everyone when first starting out. Whatever plan you choose will affect both your financial situation and your mental well-being.
For example, if not having money in your savings account causes anxiety for you, paying off your debt before saving money is probably not the ideal plan. On the other hand, if it is the debt that is causing your angst then maybe that needs to go first.
You don’t have to choose between saving money or paying off your debt. It does not need to be a do one first and then does the other.
There is a lot of information out there suggesting that this is the best method. In reality, there is no magic formula. There is only perseverance, dedication, desire, and drive.
Maybe a more balanced approach will work better for you. Below is the strategy that worked well for us. Check it out and see how it resonates with you.
A balanced approach
When we started our journey there was not a lot of income and there was quite a bit of debt. Savings was really important to me and not having much in our account really stressed me out.
My husband and I had a goal to pay off all of our debt but not contributing to savings just felt too uncomfortable and risky. We took a more balanced approach, contributing 50% toward debt and 50% toward savings.
Once the savings account was at a reasonable level we adjusted the percentages to 80% toward debt and 20% toward savings and eventually 100% toward our debt. It wasn’t too long before we were debt free and had decent savings.
This balanced approach was much better for us emotionally and worked out well. Yes, in the beginning, it felt like it took a long time to see any results. But, with some patience and consistency, it worked out really well. It may have taken a little longer than if we tackled only the debt all at once but what we gained were some peace of mind and a bit more security.
Of course, this method will not work for everyone, and depending on your situation you may choose to put all your extra resources into paying down your debt or beefing up that savings account.
Below are a few things to consider when deciding whether it is best for you to save money or pay off debt.
Why you might choose to pay your debt first?
Maybe you already have a fairly decent emergency fund. You are comfortable with the number and are not feeling any stress or anxiety in that area. However, you are thinking to save for a larger purchase and are curious if it is better to do that or pay off your debt first.
The short answer is to pay your debt first.
Once your debt is paid, you free up all that money you were using to pay it down to accelerate your savings for that large purchase. Also, if your large purchase requires a loan, like a home mortgage, you will have a better chance of qualifying for the loan. Also, you won’t need to worry about paying your credit card bills in addition to your new mortgage payment.
Why you might choose to save money first?
It is important to have an emergency fund available. If you do not have any cash reserves in the bank and an emergency occurs then the chances are high that you will resort to using your credit card.
If you have no emergency funds, then save first.
How much money should you have in emergency funds? It depends on where you live and what your current expenses are. In general, you should have enough to cover unexpected expenses. One thousand dollars is a good number to start with but if you live in a pricey area or you have a large family you may feel better with more.
You probably do not need to wait to have 3-6 months of living expenses in savings before paying down your debt. A few thousand dollars is sufficient unless you are nervous that you may lose your income source in the near future.
Once you have your initial emergency fund you can start putting money toward your debt. After the debt is paid off you can allocate that money to your savings. If you are a little nervous, you can try the more balanced approach I mentioned earlier.
Final words about whether to save money or pay off debt
There is no one-size-fits-all when it comes to deciding whether to save money or pay off debt first. Your circumstances play a big role in your decision.
This means that your first step is to figure out where you are and what you want. Take a good honest look at your current financial picture and how you arrived there. What are your spending habits and what is your money mindset? Create your vision, check in on your values, and get motivated to reach your goals.
When determining your plan, check in if you have any anxiety about money, and then be sure to create a plan that you can feel good about. A plan that feels good is more likely to be followed.
Good luck with your adventures. If you have any questions or comments, please reach out. I’d love to hear from you.
Thanks for reading!
Stay balanced,
Jill