Paying off debt or save money: Which should come first?

#SmartKobo: Pay off your debt or save money: Which should come first?

Paying off debt provides sure path to financial freedom

Depending on what you are borrowing for, debt itself is neither an enemy nor a burden. In fact, debt can become a great enabler in the wealth creation process as access to credit can make all the differences.

However, debt or borrowing that leads to debt becomes an enemy when it is used for unproductive venture. Usually in such circumstances, it becomes difficult to service and therein lies the problem.

Paying off debt or saving money is a personal finance dilemma that many people face today. But it is important to note that both are very important financial goals.

While clearing your debt is essential as it brings a new certain kind of freedom but it is advisable to put aside 10-20 per cent of your income into your savings account in order to plan for an emergency or even provide resources for future investment. Undoubtedly, debt repayment can affect you from reaching your financial goal if you do not plan for it to accommodate some levels of savings.

The best strategy is to adopt a blended approach and save some money while you pay down some of your debt at the same time.

When you understand the pros and cons of paying off debt or only savings, you can better assess your own situation and see how to tweak your savings and debt-payments to move your goals forward in each area.

CONFRONTING THE DILEMMA

If you pay your debt off first and put no money in savings, the shortcoming is that you will have nothing to fall back on when faced with financial emergency. If this happens, the chances of relapsing into debt is high. But then if you leave your debt in order to save, the interest will keep accumulating, and clearing the debt eventually might erode your savings and leave you with nothing.

So, it is better to clear your debt before saving. However, for you not to wave the concept of saving aside, you can decide to save a small portion of your income, say 10 per cent to balance the two. That way you meet your debt obligations while keeping something for yourself.

To get started with repaying your debt, here are four things to consider:

Calculate your expendable income (what is left after bills and food).
List all your regular expenses (even if they are periodic) and see if there is anything you can eliminate.
Create a budget based on that number and include paying down debt as a significant part of the equation.

It also helps to identify what your financial goals are, so you can prioritise them in your budget. In this case, we are assuming that paying off debt is your number one priority. By accounting for a monthly repayment in your budget, it will be better to ensure that you still have money left over for necessities.

If you already have adequate savings in your emergency fund, you may want to focus on quickly eliminating debt.

However, if you find yourself making only minimum payments on debts with extremely high-interest rates, those debts may be causing you to lose money and preventing you from achieving your overall financial goals, and you may want to focus on paying off that costly debt.

An important part of building a budget is focusing on your priority expenses first, so that you can free up money to put toward a debt reduction plan while hopefully still being able to contribute to an emergency fund.

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