Better Off Paying Down Debt Or Save

Wednesday, February 15, 2012, AM | Leave Comment

These days it seems like a chicken and egg question. Should you pay down debt and save later or save now and pay down debt later?

Well! It’s not that simple or black and white. There is a lot more involved. Personally I think you should pay down debt first.

But at the same time, try to set aside some money for emergency fund. For many folks, this may be the hardest thing to do because of not enough money coming in.

However, we all supposedly belong to the human specie which is individualistic, independent at heart and has thinking power better than all the known species combined. [I said that but I don’t know how true it is. I just assume it is.]

What I mean is we all have different circumstances to live in. Our finances are different. So each one of us acts in separate ways. But like anything else, there are commonalities in our personal finances as well.

Basic Reason why you should pay down Debt first…

If for nothing else, do it for the interest. The extra money you are paying to satisfy your debt obligation is many times over the interest you get on your savings account. Along with paying down debt first, you must save and increase your contribution to emergency fund.

There are certain steps you can take to embark on the journey of paying down debt and savings at the same time.

  1. Consolidate your Debt

    Credit cards carry more interest than mortgages. Some experts suggest to consolidate your credit card balances into your mortgage debt. The interest on mortgage may be tax deductible. So you get the best on both ends – lower interest resulting in lower monthly payment and help from the government as well by deducting your interest on mortgage.

  2. Save for Retirement

    Most employers have 401(k) and other retirement programs. Try to participate fully – to the maximum if possible. Or at least enough that you get eligible for employer’s matching contribution. That’s free money in every sense of the word.

  3. Save for Emergency Fund

    Like I said before, along with the other steps, saving for emergency fund is as important as anything else. So doing it will do you good.

  4. Change your Attitude from Spending to Saving

    If you have not been able to save up until now – like many people – for a variety of reasons, try to save even if as little as $10 a week. That’s more than $500 a year. The important thing to change is your mindset from spending to saving no matter how small.

  5. Think real hard to Renew or Extend Debt

    For most folks, renewing or extending debt has turned out to be a bad idea if not a complete disaster. They were better off before they took this step. Don’t fall into the mortgage trap like some of the commercials on TV would have you believe that they will help you get rid of your debt overnight.

In a Nutshell
In my opinion, start paying off your debt now and save later. However, create an emergency fund if you have not already done so and keep depositing into it even if a small amount. That will do you good in case of an emergency which can strike anytime.

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