If you’re one of those who has got outstanding debts and also have disposable income, then the obvious confusion you’d be facing is whether or not you should save money or pay off your debt. Now, this is indeed a tricky situation and needs to be given careful thought. With the economic crisis that’s prevalent all around, it’s definitely not a happy world all around at least as far as finances are concerned. This gives all the more reason for you to consider how exactly you’re going to balance saving money when paying off debt.
3 Crucial factors for you to consider
In the debate between whether or not you should save money or pay off debt, there are 3 crucial factors that you’ve got to take into consideration. After all, it’s only when you judge these factors and weigh the pros and cons would you be able to come to the right decision ultimately.
The concept of free money
Fact remains that the concept of free money makes saving all the more attractive. For instance, if you choose to save a certain amount in a retirement account, then it could ultimately go on to mean more money especially if the amount goes on to be saved in a 401(K) plan along with your employer making a worthwhile contribution. Moreover, there’s also the prospect of being eligible for the savers tax credit and that can go up by a considerable amount. This credit would also be available even when you choose to add the amount to an individual retirement account. All the more reason why it proves to be beneficial is the fact that it aids in reducing the cost that’s associated with funding of your retirement account. Hence, you see in your endeavor to pay off debt you can’t really ignore saving altogether.
The interest cost against the interest earned
This again happens to be a rather common decision swaying factor and it includes the cost of the debt versus the interest that you could be earning on the saved amount. Given this situation, your main objective would be to determine the net financial results of savings plus interest against the reduced interest on debt. The best idea would obviously revolve around the fact that you split your disposable income between saving and paying off debt. No need to reiterate that saving remains important at any given point of time. For it’s more than obvious that savings is essential. Without savings it’d almost be as though you’re hunting for financial salvation in the dark with no idea of which way you should go.
The necessity of rainy day fund even when paying off debt
In case it so happens that you don’t yet have a rainy day fund set aside, then well it’s high time that you worked on one. This is obvious since a rainy day fund is the only thing that can come to your aid, be it in case of an emergency or even for paying off huge debt amounts. Financial emergencies are known to take people by surprise and it’s for instances like this that you need to be prepared. For in your quest to pay off debt, if you haven’t put aside any savings, then it’s quite likely that you’re going to hit a roadblock when faced with an emergency which is going to pull you deeper in debt.
So, you see there actually can’t be any debate when it comes to saving for it’s all important and will remain so. The essential idea is to set aside proper savings that’d in turn help you pay off debt.
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