Many people want to know: Should you pay off your debt or save money? The answer is both. If you have debt, it’s best to pay it off as quickly as possible.
After all, when you have debt, your lender is owed money, and it’s a good idea to get that money back as soon as possible. It’s also best to put your money towards something that will grow and help you build wealth.
That’s why you have debt in the first place. So, should you put your money towards your debt or towards saving money? If you have debt and are considering your options, here’s what you need to know.
Debt is when you borrow money to help fund your lifestyle. For example, if you have a $10,000 loan at 12%, then you owe $1,200. That $10,000 loan is your debt.
You’re not actually earning the money that you’re repaying that loan with, so it’s important to understand the difference between debt and savings. Since debt is when you borrow money, it’s also important to understand what it is exactly that you’re borrowing.
Should You Pay Off Debt or Save Money?
There are pros and cons to both options, so it’s up to you to decide which is better for you. While some financial pundits will tell you that you should always pay off your debt, that isn’t necessarily the case.
After all, if you have too much debt, it can greatly limit your ability to save and invest money. So, should you pay off your debt or save money? It depends on you, the person. If you have debt, and you’re considering your options, here’s what you need to know.
Why Paying Off Debt Is Better
If you have debt and are considering your options, here’s what you need to know. Why should you pay off your debt? Well, there are a few reasons why paying off your debt is a good idea.
It takes less time. Since you don’t have to devote as much time to paying off your debt as you do to saving money, you can put your efforts elsewhere.
It’s safer. Borrowing money is inherently risky, and the more you borrow, the more unsafe it becomes. If the economy takes a downturn, the government can seize and freeze all of your assets. With debt, that’s inevitable.
You get more money back. The faster you can pay off your debt, the more money you’ll get back from your lender.
Why Saving Money Is Better
If you have debt and are considering your options, here’s what you need to know. Why should you save money? Well, there are a few reasons why saving money is a good idea.
It’s more flexible. Saving money is flexible. It can be used for all kinds of different things, so it can be used for any purpose. If you want to buy a new car, a house, or open a business, you can do that with your savings.
It helps protect you. The more you have, the less likely it is that something will happen to you. If something were to happen to you, your loved ones can take care of themselves.
It’s more effective. The more you save, the more money you’ll have. That means you’ll have more options when it comes to investing your money.
There are pros and cons to both options, so it’s up to you to decide which is better for you. If you have debt and are considering your options, here’s what you need to know.
If you want to pay off your debt as quickly as possible, you should try to make the minimum monthly payments. After all, it’s usually much easier to pay $15 or $20 every month than it is to pay $300 or $400 every month.
If you can pay less, that’s great, but if you can’t, don’t worry too much. If you want to save money and build wealth, there are a few things you can do. First, work as many hours as you can.
Second, look for ways to increase your income. And lastly, try to cut any unnecessary costs out of your life, giving you a higher percentage of disposable income towards both paying your debt repayments, and putting some away in a savings account.
“Consumers can and should do both.” Even if you're working on paying down debt, building a healthy savings fund can help you avoid adding to that debt. Having an emergency fund reduces the financial burden when the unexpected happens, even if you start with a small amount and save slowly.
Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.
Many people believe that having no debt is ideal, but in many situations, debt can actually be considered good for your finances if it helps you build wealth. For example, if you cannot afford to buy a home with cash, you may go into debt with a mortgage.
A less aggressive investment mix, meaning one with a lower allocation to stocks, may be expected to result in slightly lower returns (on average) over the long run. And with slightly lower expected returns on investing, paying down debt comes out ahead even at slightly lower interest rates.
If you have an emergency fund saved, you're probably ready to prioritize paying off debt during a recession. When it comes to paying down debt during a recession, you want to focus on your highest interest debt first – things like payday loans and credit cards are a good place to start.
According to data available from the Federal Reserve's Board Survey of Consumer Finances, the median savings balance — not including retirement funds — of Americans under 35 is just $3,240, while that jumps to $6,400 for those ages 55-64.
Carrying the burden of debt is the way of life for many. According to Experian, as of the third quarter of 2023, the average American held $104,215 in debt. You're probably very familiar with the negative side effects of debt and how hard paying it down can be, but do you know that by age 45, you should be debt free?
Wealthy people aren't afraid of borrowing. But they typically don't borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses. Instead, rich people tend to use debt as a tool to help them build more wealth.
It may be more prudent to pay off debts before saving for retirement for the following reasons: Less debt means lower monthly payments. If you work toward paying off debts and don't accrue further debt, your expenses should decrease each month. This is a wise move if you're looking to free up cash in the near future.
What percentage of America is debt-free? According to that same Experian study, less than 25% of American households are debt-free. This figure may be small for a variety of reasons, particularly because of the high number of home mortgages and auto loans many Americans have.
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt. There are a few things you can do to pay your debt off faster - potentially saving thousands of dollars in the process.
Being debt-free is a financial milestone we often hear about people striving for. Without debt, you can focus on building more savings, investing those extra funds and just simply having more peace of mind about your finances.
You can prioritize your high-interest accounts using the debt avalanche method. It works like this: Make just the minimum monthly payment on all of your accounts except the one with the highest interest rate.
Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.
With no emergency savings to draw on during a crisis, you may have to rely on a high-interest credit card or a personal loan to cover the costs. To avoid compounding your debt, try to set aside between three- and six months' worth of expenses in an emergency fund in a high-interest savings account.
In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.
Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget. Consider where you'll get the money to pay off your debt — is it being diverted from your retirement savings plan?
By 30, it would be beneficial to have $50,000 saved. This comes from the goal of being able to replace about 70% to 80% of your pre-retirement income in retirement.” While having the equivalent of your annual salary saved up by 30 may seem unattainable, Kovar believes it's achievable if you start saving in your 20s.
The Bottom Line. When deciding whether to save or borrow, start by asking yourself how quickly you need the item. If it's not an emergency, saving up is often the best option. If it is an emergency, review your borrowing options and choose the one that costs the least.
Introduction: My name is Duane Harber, I am a modern, clever, handsome, fair, agreeable, inexpensive, beautiful person who loves writing and wants to share my knowledge and understanding with you.
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