Which is more important: savings or paying down debt? You just came into an extra $100. Do you put it in the bank for a rainy day, make an extra credit card payment or go out to dinner and a movie?
There are people who will argue for all three options but it depends on where you are financially, what your goals are and when the last time was you had a nice dinner out.
Let’s forget about the actual dollar amount for a moment and debate the savings versus debt for a moment. Valencia Higuera from Money Crashers offers pros to both options in her article, but seems to lean towards paying off your debt:
1. To Eliminate Paying Interest
The majority of credit card holders pay interest on a monthly basis, which can be more than 20%. High rates make it difficult to pay down your credit card debt, especially if you fall into a rut of only paying your monthly minimum. This is because a large portion of your minimum payments is applied to the interest charges, and not the principal.
2. To Improve Your Credit Score
If you’re trying to improve your credit score in order to qualify for a mortgage or auto loan, paying off your debt first can jump-start your plans.
3. To Obtain Peace of Mind
The thought of paying thousands of dollars in interest in addition to your debts can make your stomach turn. If you seek relief from this stress, paying off your credit card debts as soon as possible is the best course of action.
Craig Guillot from Mint Life agrees. Paying off high-interest rate debt is in your long-term best interest:
“A number of experts say that when you’re facing the double whammy of high-cost debt and a lack of savings, it’s in your long-term benefit to put all your money towards paying down your high-interest debts as quickly as possible.”
However, LaToya Irby from The Balance, has a little different perspective:
“If you pay your debt first and put no money in savings, then you have nothing but your credit cards to fall back on if there’s a financial emergency.
Unfortunately, you can count on some type of expense coming, and it’s usually when you least expect it. Using your credit cards to fund an emergency only makes it harder to pay off debt.”
So what is the answer to the savings vs. debt payment question?
In order to ensure that you are moving towards your long-term goal of having enough money in your retirement years, the answer is “you need to do a little bit of both.”
If you are currently drowning in high-interest credit card debt, the experts say to work on paying down your highest interest rate credit cards first. However, if you have a few department store cards with smaller balances, there can be satisfaction in paying them off and being done with them. That is assuming you won’t immediately be compelled to celebrate with a little retail therapy.
Additionally, setting up a habit of putting a little money away each month will ensure that you have cash on hand should your car need new brakes, the hot water heater goes on the fritz or your kids need braces.
If you do not have a monthly income or even if you do, many experts suggest that you have enough money saved so that you will be able to go for three months without receiving any income. Even if you are working, you could get hurt or become ill which will prevent you from working.
These questions are difficult to answer because no one can predict the future. If you believe that your income will be steady for the next several months, paying off the cards, especially those with higher interest, will be a good strategy. If, however, you are concerned about your health or being injured so that you cannot work, having a contingency fund will help you heal quicker as you will not have to deal with the stress and anxiety of not knowing how you are going to feed the family.
Back to the original question: you just got $100 you weren’t expecting, what should you do?
Take your significant other out for dinner. Bring paper and pencil and seriously develop a budget and plan for paying off debt and putting a little money away. Coming up with a mutually agreed upon plan will feel great, the dinner out will be a treat and hopefully, the open communication will be a benefit for your relationship.
Southern Illinois Bankruptcy Attorney law firm Bankruptcy Advocates is located in Carbondale and serves a wide geographic community. The first consultation is always free. Give us a call at 618-549-9800 or email us at [email protected] to speak about your case or legal matter. Convenient appointment times are available.