With many Americans weighed down by debt, they are often faced with the challenge of deciding whether to save or pay off debt. While both are beneficial, there are some things that need to be considered when making the decision.
Do You Already Have An Emergency Fund?
One of the first questions to ask yourself is whether or not you have an emergency fund. This type of savings is essential for any unexpected expenses that may arise.
If a sudden home repair or medical expense presents itself, an emergency fund allows you to pay for the expenses without having to take on more debt. If you do not have emergency savings, it is probably better to save money toward one before allocating extra money to paying off debt.
How Much Debt Do You Have?
Another thing you should consider when deciding between saving or paying off debt, is how much does your debt actually cost. To do this, you’ll want to find the balances of all your debts. Next, you’ll need to locate your interest rates. When these two numbers are multiplied together, you’ll have the amount that your debt costs you each year.
How Much Could Your Savings Earn?
After calculating how much your debt costs you, you’ll want to find out how much your savings would earn you. In many cases, the interest rate on a savings account is very low. Traditionally, you’ll earn between 1 to 2 percent in a savings or money market account. The amount that your savings would earn should be compared to the amount that your debt is costing you to see what would be more beneficial. In all likelihood, your debt will be costing you more, so it may be better to pay it off before saving.
What Are Your Future Goals?
It is also important to consider your future goals when making this decision. If you have a big transaction in your future it may be best to save. Also, if you are close to retirement, it may be more beneficial to put the money into a 401(k). This is especially true if your employer matches your contributions, as you are receiving free money. However, paying off debt can leave you with more freedom for new loans moving forward.