![]() ![]() That, then, could lead you to take on even more debt. If every dollar remaining after you pay everyday expenses goes toward reducing debt, then you’re not setting aside money in case an emergency expense pops up, he says. Jeremy Shipp, a CFP in the Richmond, Virginia area, says saving versus paying down debt should be a “coordinated and efficient” strategy that emphasizes the ability to access cash quickly. Why? Because paying 18% credit card interest will more than cancel out the 6% you’ll earn from your savings. If you’re likely to earn 6% in annual returns from retirement savings, but you’ve amassed credit card debt with an APR (annual percentage rate) of around 18%, your best bet likely will be to first clear out the debt. ![]() Here’s an example of that opportunity cost. “Sometimes a balanced approach can be the best approach.” “It really comes down to calculating the opportunity cost of doing one thing over another,” says Dan Mathews, a CFP in the Kansas City area. In some cases, you may want to undertake saving and paying down debt at the same time. But how do you find that balance in your own situation? The answer depends, in part, on whether you’ve got enough money already stashed for emergency savings and how much high-interest debt you’re carrying. paying down debt-it’s a balancing act that many of us face. No matter which route you take, it’s important to evaluate your personal financial goals and decide which is more important. As with all things in life, deciding whether you should pay off debt or save is all about balance.Saving vs. And, you can always increase your debt payments once you’ve saved up a reasonable nest egg to cover the cost of any emergencies you may encounter. Once you’ve saved up enough in your emergency fund, you can focus on blasting through your debt.Īlthough it will take a bit longer to pay off your debts and for your savings to grow, in the end you will have achieved both of your financial goals. This allows you to repay what owe in a steady, systematic way, while at the same building up a small savings fund. If you don’t have enough emergency savings, you can still have the best of both worlds. After accounting for your fixed and personal expenses, you can divide your take-home pay and any extra money you receive, like a tax refund, between saving and paying down your debt. If you have enough saved up to cover about three months worth of these costs, you’re in good financial shape and you can focus on how to pay off debt. Track your expenses for a month so you can get a picture of how much you’ll need for groceries, clothing, entertainment and other fixed and variable costs. Instead of focusing on either eliminating your debt or rebuilding your savings, depending on your financial situation you could consider a balanced approach that would allow you to pay debt while building a small reserve for financial emergencies.Īfter you’ve created a budget and set your financial priorities, determine whether you have enough savings to get you through a financial emergency, such as an illness or a job loss. ![]() Use a Balanced Approach: Pay Debt and Set Aside Small Savings Using a budget calculator spreadsheet is a great tool that will teach you not only how to budget, but also how to get out of debt. If you decide that paying off your debts is the best route for you, the best way to get out of debt is to create a personal budget that factors in your income and your expenses, so you’ll be able to live within your means while ensuring your debts are getting paid. Paying each credit card balance down to below 75% of your credit card limit significantly improves your credit score, and paying them down further – to less than 50% of your credit limit – improves your credit score even more. ![]() The magic numbers when paying down your credit cards are 75% and 50%. However, by paying down your debts you’ll improve your credit worthiness, making you eligible for lower rates on loans and mortgages. While having a sizeable savings account with your bank doesn’t factor into your credit score, where credit card and loan balances certainly do, savings is taken into consideration when you apply to borrow money. Paying off debt first can also improve your credit score, which can better your chances of qualifying for a car loan or a mortgage – or maybe a consolidation loan if you’ve got a lot of debt. Paying Off Debt Can Improve Your Credit Score ![]()
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