Debt versus Saving

Debt Versus Saving

Which should be a greater priority? Saving is very important but so is paying off debt. When it comes to making a choice between paying off debt or saving for the future how do you do you decide what to do?

Many financial planners and experts will agree that the key to financial success is to start paying down debt, build an emergency fund for those unexpected financial events, and set aside money for saving and investing: However what order do you do these steps?

The first step that everybody keeps telling you is to prepare a budget. You need to find out how much money you are spending each month and exactly where it is all going. You need to know the amount of money that is NECESSARY each month to live and how much money you waste. Once you figure this out you will know how much money you have to pay toward debt or save.

I personally agree with the famous Dave Ramsey that an emergency fund is the first step in debt management. You have to save an emergency fund of about $1,000 before you even start trying to get rid of your debt. You need to get this $1,000 saved a soon as possible. Have a major yard sale, sell some stuff on eBay, or even pick up a part time job for a month. The emergency fund is the key to stopping your spending habits and avoiding any financial mishaps that might occur while paying off your debt.

Once you save the emergency fund then you should start paying off debt. Many financial critics will tell you to use the snowball method to attack your debt, I must agree. It is very important to focus on a single debt but not to forget to pay the minimum payment on all the other debts. Some people tell you to approach the smallest debt first no matter the interest rate and others will encourage you to tackle the highest interest rate debt first. No matter what you decide remember, it is most important to stay focused on that single debt. Pay that debt off and then apply that monthly payment to the next debt.

Once all your debt is paid you have to start saving intensively. Every dollar you save now will make your financial life in the future that much more secure. Compounding interest does amazing things over extended periods of time so the time to start saving is now! The only reason I think paying off debt you have first is if it’s not paid off then you will continously put off saving. Get yourself motivated, pay off your debt and save for your future!!!