Pay Off Debt or Save Money?

Debt is part of life, it is impossible to buy everything cash, and debt is needed to build up a good credit score. But what is the best strategy to follow? Is it better to pay off your existing debt or save money? Which option makes financial sense?

Well, this is very tricky but, saving money for emergencies and paying off your debt are both important for your financial health.

Maintaining a good financial record can work in your favour in negotiating better deals and preferential interest rates as you are considered a low-risk consumer.

Weigh your options

The order in which we do things when it comes to finances does matter and can have a greater impact. Paying off your debt first comes highly recommended when you have high-interest debt, this can help in managing your debt and overall improve your financial standing. It is all about the interest charged on debt versus interest on savings. What you decide to tackle first depends on the type of debt you have and your savings plan.

For example, a store account debt and a credit card have a high-interest rate and should be paid off quickly while a home loan has a long-term payment plan with a much lower interest rate and can be paid while you save.

So, if the interest charged on debt is much higher than the interest you earn on your savings then paying your debt first will be your best bet – you can start saving as soon as you are done paying off your debt.

Debt can be a mental and emotional burden so, getting rid of it can be thrilling.

Have something to fall back on

Having sufficient savings provides peace of mind! Once you have settled your high-interest debt then you can start saving for emergencies. There are a great number of reasons why you should have savings.

The pandemic has provided us with the best financial lesson – that having enough savings do come in handy in tough times. An emergency fund will assist in keeping you out of debt when you have sudden expenses such as house repairs, job loss, or unexpected travel.

Making saving your top priority will help you to build an emergency fund. It is advisable to at least have an emergency fund of 3-to-6-month worth of expenses. It makes more sense to save if you have a retirement savings plan through your job and more awesome if it comes with an employer match.

You can do both

Striking a balance between saving and paying off debt is the best solution. A blended approach allows you to take care of your most urgent debts, whilst building an emergency fund with long-term financial goals. You will have to plan wisely and have a standard budget that works for you.

For example, if you have R2000 to spare then half the amount can go towards your debt while the other half goes into your savings. You can balance the amounts as it suits your financial situation.

It is safe to save and have debt as long as you keep up with your payments each and every month and make sure that you do not commit to any credit that costs you more in interest than you could earn on your savings.

Carrying debt for long is not ideal, it will cost you more money in interest and affect your progress towards your financial goal. At the same time putting saving on hold can be dangerous. So, the best approach is to find a balance that caters to both your debt and saving plan.

Above everything, learn to live within your means, if you are thinking of buying something you do not necessarily need and do not have the means to pay for it cash then credit should not be an option, just don’t buy it. It is better to save and buy what you need in cash.