This is a question people will ask themselves at one point or another in their lives, for most people it’s a reoccuring question. The answer isn’t quite so simple and is really situational. Not only is situational, but it’s extremely emotional for most people. Money seems to have a great emotional impact on a lot of people. Let’s address the non-emotional aspect of saving vs paying off debt first.
First off, if you don’t have an emergency account or some type of money saved up that you can tap into incase you lose your job or income, then your first priority is going to be saving up your emergency money. Typically, an emergency fund consists of 3-12 months of your basic expenses per month, stored away in an account. It’s there incase you lose your job or income and need to live while looking for work or getting more money. If you don’t have an emergency fund it can really take a toll on your finances or mentality. You’ll find yourself living off borrowed money in a hurry or worse yet, moving in with a relative and making things uncomfortable for you and your family. So if you don’t have an emergency account get one. The only reason you wouldn’t save for one is if you had some astronomical credit card or debt that was consuming more money than you make in a month in interest, but at that point it’s time to consider bankruptcy.
The next thing you want to consider is what are you going to be doing with the money you save. Are you saving it for a down payment for a house or something else with a purpose or cause? If so, then you should save your money. The only reason you wouldn’t save your money is if you don’t have any idea what it’s going to be used for. At that point you should focus on debt or high interest loans. A lot of people will determine whether or not they will invest or pay off debt solely off the interest rates alone. This is not a good idea because yes you may only get a 6% return and have a 12% loan eating away interest so that it makes more “sense” to pay off the debt first, but if you keep building into your investments, that 6% will eventually become a high enough amount that it can pay for the interest on a 12% loan and more once the balance is great enough. Unless your 12% balance is interest only you’re still making a dent in the principal at least. A lot of people find it more convenient to have the cash on hand and using the interest accrued to help pay off debt, rather than just pay the debt off straight forward and not have that cash available anymore. You never know when an opportunity will present itself.
If you’re going to be buying a house or need to pay off a certain amount of monthly obligations for a house loan, or something of that nature, you will want to pay off the debt then. As long as you have a plan for the money and a goal, that’s really what matters the most.
Having said all of that, there are a lot of emotional issues that will over rule any type of common sense and logic. Most people can’t stand having credit card debt or having a lot of accounts to pay each month so they become consumed with trying to pay something off. A lot of people do not feel comfortable owing anyone money. Just make sure you identify why you are asking yourself whether or not paying off debt is worth it. If it’s an emotional thing then don’t worry about the numbers, they don’t matter. If it’s not an emotional thing than focus on the numbers. Don’t try to do both, you’ll end up completely contradicting yourself every week and it never stops.
Recent Comments