Whether you are a beginner when it comes to managing your money, a new investor who is learning how to save, or even a seasoned credit card user of many years —one question that you may be asking yourself is whether you should make paying off your debts a priority over saving.
When planning your monthly budget, after allocating a percentage of your income to living necessities like housing, transportation, and food — you also have to decide how much of your monthly budget you’ll allocate to saving and repaying your debts. This is a financial dilemma that many people face on a monthly basis. Should you pay off your debt or save — or both? Truth be told, there are several advantages and disadvantages (believe it or not) to paying off our debts, as well as saving for the short-term and investing your money for the long-term.
One big advantage to paying off our debts is not being mentally burdened by overwhelming debt when we should be using the money to pay for other more important things. And when you consider the other advantages to paying off debt, such as saving on interest costs, building a solid credit score, and establishing our credit worthiness — it’s easy to see why some people feel that paying off debt should be a priority over saving money. However, this isn’t necessarily always true.
The advantages of saving money versus paying off debt is that we can save money for short-term goals such as building an emergency savings fund, as well as saving for long-term goals — saving for retirement, for example. Saving money in an emergency fund is a smart financial goal because if you ever do have an emergency, you won’t need to rely on credit to cover the unexpected costs. This will save you from accumulating more debt. And saving for your retirement ensures that you won’t have to continue working for the rest of your life.
The advantage of saving money and paying off your debt simultaneously means that you can work towards two goals at the same time. It’s true that the interest you are paying on your credit cards may be a lot higher than the interest that you are earning from your savings accounts and investment accounts, but you can kill two birds with one stone if you allocate enough money in your monthly budget towards both savings and paying off your debt.
Throughout our lives, regardless of which life stage we are in, we will always be paying off some form of debt — car loans, student loans, home loans — you get the idea. We also have to keep in mind that the only way to accumulate assets is to save and invest our money, and paying off our debts does not help us accumulate assets and increase our net worth. Bottom line? If we wait to pay off all of our debts before we start saving, we may just be waiting forever before we save a dime.