“Save money vs pay off debt” situation is an inevitable situation where people eventually are.
People with debt are usually confused about whether to pay off debt or save money especially if the debt has some high interest.
If you are in a situation where you have to choose between saving money or paying off debt, try to answer these questions.
It will help you decide what to choose between both those hard options anyway.
Do You Have Emergency Savings?
Emergency saving is the saving you especially use only for emergency incidents.
The incidents should be correlated to health. Or, in any case, you could predict it will come in a near time.
If you don’t have any in an emergency savings fund, then you need to allocate it in the first place.
It doesn’t have to be big, of course. But, the amount should be able to let you have some breath while you get in a car accident, for example.
If you already have the emergency savings, then the rest is easier to decide.
How Much is Your Savings?
Not having enough savings could be your biggest financial regret. Especially in the tough era like the Covid-19 pandemic nowadays.
About 23% of Americans proved that. And, it’ll be a waste if you don’t take any lessons from their experience.
So, having a decent amount of savings is your goal before setting aside your allowance to pay your debt.
Many financial strategists recommended 3-6 month allowance savings. That amount should give you enough time to think and act properly if something happens.
How Big is Your Debt?
The amount of your debt comes in second place on the list after emergency savings.
The less your debt is, the faster you should pay it off.
In fact, if you could pay off without removing the savings part, then you don’t need to think twice. Saving after paying off debt is fine anyway.
Or, if your debt is quite big, then think how much is your installment every month?
That’s why, when you take on some debt, you should try to get the last installment in the first place.
It will help you manage your allowance much easier.
How High is The Interest?
The interest is probably the only thing that makes you worry.
Debt with high interest should be paid as soon as possible because it could get bigger and bigger as time goes.
Besides, if you do simple math, it will be clear that paying high-interest debt is the wisest choice.
If you had a US$ 2,000 debt with 15% interest, then the amount of interest will be US$ 300.
Meanwhile, if you had US$ 2,000 savings with 5% interest, then the amount will only be US$ 10.
Well, numbers don’t lie anyways. In fact, if you have several debts, the one you prioritize to pay is always the one with the highest interest.
This decision will answer how to keep the balance between paying off debt and savings.
Can You Just Pay The Minimum?
The minimum payoff certainly makes you go nowhere with your debt. But, in case you don’t have any emergency savings, it will be the best choice.
Paying off debt while you don’t have any savings will make you end up in more debt if something happens.
So, paying the minimum amount the bank allowed while building up your savings is wiser.
But, how long do you just pay for the minimum? Certainly, you don’t wish to do that for the rest of the time.
Well, you could read chapter 2 above about how big your emergency saving should be.
So, as long as you can pay the minimum, just do it till you have enough savings.
How is Your Job Situation?
It’s about your job safety. If you think you have a secure job for the future, then paying off debt will be okay.
But, if you somehow worry about your job today, then savings will be the right thing to do.
It’s because if your job is secure, you’ll get more chances to pay off your debt.
On the other hand, if you somehow get unemployed and have no savings, you’ll end up making more debts.
So, understanding your job situation will help you decide what to do about paying off debt or saving money.
Do You Have Other Income?
Business opportunities could be anywhere. You might find one in your hand right now.
If you have other income, especially as the result of your side business or investment, then it’ll be easier.
Because your passive income will help you pay your debt off, so, you could keep a balance between debt and savings.
Those are 7 questions you need to answer to decide between “save money vs pay off debt.” If you have a clear understanding of your situation, then your decision will be fine.