Balancing Between Paying Debt or Saving

You are seriously overspending if you have debt and trying to save, but there is a swift solution for this. Best solution is to pay your debt first before you save or even before you start on your mortgage. Forget the old cliché “you MUST have an emergency savings fund”. Because this logic will get the better of you while trying to pay your debts.

Here are some guides to pay off debt first rather than save at the same time:

> Pay off your debt with any savings you have. – Well, this may sound a bit off, but, yes, you read it right. My point is, if you have a savings of $1,000.00 and you owe the same amount from a credit card, compute the high interest rate incurred from your debt from the interest earned from your savings. Debts usually cost more than savings earn. Cancel them out and you’re better off.

> Banks would welcome your savings and incur debt, too! – Simply put, if you save/deposit money to the bank, you are actually lending your cash to the bank for them to lend to other people. The difference between the rate at which it borrows money from you, and the rate it charges others is the bank’s profit. So, it will always cost more to borrow than you can earn savings.

> There is an exception to the rule! – The rule is based on the fact that it usually much higher than the benefit gained from savings. So, you will gain more by getting rid of the debt than starting to save. Consider these:

** Penalty exception. If you are caught into a debt, paying it off will incur penalty, so does with some loans and mortgages. Then leave the cash sitting in a savings account until the penalty’s small enough that it doesn’t matter.

** The interest-free / very cheap debt exception. Debts cost. Yet those who carefully and conscientiously manage their debts so they’re constantly interest-free should follow the opposite logic. If the interest rate on your debt is less than the amount your savings earn after tax then, providing you’re financially disciplined, you can profit from building up savings and keep the debts. In effect, you’re being paid on money lent to you by the banks for nothing.

> Should you need an emergency fund? – This question may be difficult to deal with, because the idea of having some cash available makes one feel safe. Especially when we talk about traditional budgeting, it always reminds us to have a bit of a “savings”. But I beg to disagree, the aim-point should be to become debt-free. Still, the best thing to do is to pay-off first your debt using your savings/emergency funds.

Read More