Choosing Between Money Saving And Debt Payment

Often than not when you are in debt you may find yourself at a crossroad wherein you will have to decide between saving money and paying off debt. Well, both are equally important aspects of money and finance management which needs to be done cautiously.

  • Both will provide you with mental peace.
  • Both will help you to reach to your bigger financial goals.
  • Both will help you to live well and peacefully during retirement.

If you want to go to your retirement debt-free, you will have to focus on both these aspects. However, some say people must focus on paying off their debts first while others contradict it by saying paying off debts now will mean sacrificing on building up the retirement savings. However, the third group of experts says that responsible people usually take an approach which is a fine blend of the two: save some money and pay down some of the debt at the same time.

Therefore, there is always a difference in opinion which makes a common person like you to make a final decision more easily. If you want to make the right choice you will first have to understand the pros and cons of all:

  • Saving money only
  • Paying off debts only or
  • Going ahead with both.

When you know these you will be able to make a strategic plan by assessing your situation better. You will, in turn, be able to move to your financial goals as well as those of these specific areas of financial management.

What is even more significant is the fact that you will not have to worry about your monthly bills, the creditors’ or debt collectors’ calls forcing you to look up at for a suitable option that will help you to get rid of your debt easily.

Paying off debt first

There is no reason to ostracize people who follow a specific approach to manage their finance and money because all are equally good, reasonable, appreciable and logically explainable.

The advantage of paying off your debt is that you will be debt-free soon and have complete peace of mind and more money in hand to use for other purposes, even saving.

But then the downside of it is that:

  • You will have no money in savings and as you may know, emergencies can arise in life any time, you will have nothing in hand to meet the expenses for your exigencies and might take on more debt and
  • There is no reason to believe that once you pay off one debt you will make a resolution not to take on any more.

In fact, when you pay off your debts you may be encouraged to take on more having grown-up confidence after being successful in paying off one time. Experts say:

  • A person usually falls in a debt trap by taking on more debts after repaying one and then they find that they cannot repay any now
  • If a person follows must be highly focused, have a strategic plan to repay debts, create a budget after making lots of sacrifices for personal cravings just to secure their future and
  • Stay away from using their credit more too often and especially in case of an emergency which is a common practice amongst people living and managing their money this way.

In fact, more a person uses their credit cards, to fund an emergency or a personal craving, harder it becomes for them to repay their debts. This means they are unable to make any savings for a longer period of time, thereby affecting their retirement plans significantly in an adverse manner.

However, you may put your debt payments first under specific conditions to ensure that your debts are well managed.

  • First, you should always pay off any credit card debt that you have, preferably within the interest-free period, if any. As you may know that credit card debts are the most dangerous of all forms of debt as these carry a very, very high rate of interest. Missing out on one or a couple of payments will skyrocket the outstanding balance of your debt. Ideally, when you pay off a credit card balance first anyhow, you will save on a huge amount of interest that you would have needed to pay each month. This amount, when you calculate carefully will be much more than the returns you may get from your earnings in stock market or if you leave the money in your savings account.
  • Secondly, if you have a mortgage, a student loan or any other types of fixed payment loans, it is a better idea to make some extra payments. This will help you to reduce the tenure of your loan. This is because the lender will consider the extra money as your future payments.

There is only one thing to worry about in such an approach: no extra payments will influence the lender to reduce your monthly payments by recalculating the loan. Another point to note before you pay off these loans early is the amount of tax deduction. This amount will be significantly less than the amount of interest you would have paid as interest on your loan till its full lifecycle.

Saving money first

If you choose the savings-first option without paying off your debt, on the other hand, will mean you will pay more money in interest over time. That means you will spend more on debt investments than earn on it. It also means you will enter retirement with debt.

  • However, you can save first when:
  • You know you can live your retirement with debt
  • Have very small amount of low-interest debts
  • When you know you can start repaying soon and
  • If you know that not savings will have negative consequences on your retirement.

The best approach is to find a balance between and pay both with an amount that will not affect anything, your savings and debt repayment, in a negative manner. It is never a wise decision to put off one in lieu of the other.