Should you save or pay off debts?
Many people look at the principles of financial health, and notice that saving money is almost always near the top. However, when they look at their own financial situation they can't help but notice their debts, and the high interest rates attached to these debts. Because math would dictate that you should probably pay off debts first, and save later, as you can never earn as much interest as you are likely paying out without great risk, it brings to the table the question of save first or pay off debts first? The answer is do both. Here is why.
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Having a savings does several things for you financially:
- It protects you from further debt. If you were to have your car break down, lose a job, have a washing machine go out, etc. how would you pay for it? If you do not have money saved up for emergencies and life happening, you would have to go into debt to do this. So, a savings means less risk of more high interest debt. This is a very good thing.
- It helps you establish good financial principles.
Learning to save takes discipline, and good discipline is the first step to being good with your money. If you pay off your debts, but never learned to save, you will quickly get back into debt. So, establish the good habits that will keep you financially healthy once your debts are paid off. - It gives you the ability to make financial decisions less emotionally.
When you have a safety net, money in the bank, a savings to rely on if necessary you tend to be far more wise with your money. Why? Because emotions, which frequently get in the way of being smart, are no longer an issue. You provide for your need for security with a savings.
Paying off debts does several things for you as well:
- It frees up some of your money for investing, etc. Once a debt is paid off you can take the amount you were paying into that debt and invest it in order to let that money earn you more money, instead of always being the one doing the labor to earn money.
- It relieves you of a burden.
When you pay off debt you feel so much better. It is an exciting feeling because it means that an obligation is lifted. Even if your debts are relatively low, what would you feel about them if you lost your job? Stress. So, eliminate them, and eliminate that burden. - It eliminates interest you would have paid.
Debt costs you money, money that could be used elsewhere, including to earn you more money.
As you can see, if you combine the two, the benefits are great, and you get better off while establishing good principles. So, do both!
