It’s a “tale as old as time.”
How to Prioritize Paying Down Debt vs. Savings
These six ideas can help you set priorities to meet your financial goals.
If you’re reading this, you’re probably interested in building a solid financial future. But you may have questions about how to accomplish this. Should you save more for the future or pay off your debt? Can you do both at once? Consider prioritizing boosting your savings and paying off your debt in this order – adjusting for personal needs, of course – to optimize your financial well-being.
1. Pay Down High-Interest DEBT
Putting $1,000 in a savings account paying 1% interest while carrying a $1,000 credit card balance with 18% interest doesn’t make much financial sense. If you have high-interest credit card debt, those double-digit interest rates are eating up money that you could be putting toward your savings. It might make sense to prioritize paying off the higher-interest debt so you’ll have more cash available to put away or pay other debts. Here’s another benefit of paying down credit card debt: By reducing the amount you owe, you’ll also improve your credit score.
2. Pump Up Your Emergency SAVINGS
What happens if your car breaks down or you get hit with an unexpected medical bill? Do you have enough cash on hand to cover these emergencies? According to the experts, most people don’t have enough money put away to deal with a sudden financial need. If you haven’t already started, concentrate on setting up an emergency fund before focusing on saving for retirement. Doing so can help you feel more financially secure as well as give you some much-needed peace of mind.
How much should you put away? Experts recommend having at least three to six months’ worth of living expenses set aside in an interest-bearing savings account. But if you can’t manage that, every little bit helps – even $500 can come in handy in an emergency. You can then put aside a little cash each month to further prepare for an unexpected expense.
3. Build Your Retirement SAVINGS
Once you have an emergency fund established, start contributing to your retirement savings, such as through a 401(k) with your employer. If they’re offered, take advantage of any employer matching options, which can help grow your savings. If you don’t have a retirement plan through your company, think about contributing to traditional or Roth IRAs. When it comes to saving for retirement, the earlier you start, the more your fund can grow. Once you reach this point and can build your retirement savings, you can begin tackling other important money management tasks.
4. Knock Down Your Lower-Interest DEBT
If you’re paying off a car loan or a student loan, look at the rates and terms. If they’re reasonable, you can stick with the same monthly payment. You can also bump up your payments to pay off your loans faster. You’ll save on the total interest paid and can use that savings to add to your retirement fund, your emergency fund, or other financial goals.
5. Contribute to Short-Term SAVINGS
One of those financial goals might be saving up for a new car, an upgraded appliance, or a vacation. A short-term savings goal can usually be accomplished in one to five years, depending on what you’re saving for. Estimate how much you’ll need and how much to set aside each month. Then automate a recurring deposit from your checking account to your savings account for that amount each month and watch your short-term savings grow.
6. Don’t Forget Education SAVINGS
If you have children or are planning a family, you’re probably thinking about the cost of college. It can be a big expense and you’ll want to start saving as early as you can. You can estimate how much your child’s college might cost and then consider a tax-advantage 529 education savings plan. This plan lets you contribute as you go along, and withdrawals are tax-free as long as the money is spent on qualified education expenses.
The Right Balance
As you can see, it’s possible to pay down debt AND build your savings. The key is finding a balance that works for you and your family, figuring out a plan, and sticking with it. Additionally, the advice of a financial professional would enhance your success.