Pay Off Debt or Save?
Paying Off Debt vs Emergency Fund
When you are considering whether to pay off debt or save, you need to think about your emergency fund. An emergency fund is important for those unexpected costs that can pop up at any time or even if you were to lose your job. This is essentially a safety net that can stop you from suffering big consequences if you are living paycheck to paycheck.
For this reason, if you are just coming into more money, it is usually more beneficial to save up your emergency fund first before paying off any debt. This also helps you to stay on track when paying off debt, as a large unexpected cost such as a home or car repair can take away your focus and determination to pay off debt.
Positive vs Negative Interest
One main factor that many people take into consideration when choosing whether to pay off debt or save is the positive vs negative interest. Will you make more interest on the saved money? Or is the interest rate on your debt higher?
You will need to calculate what the net financial results are of the reduced interest on the debt against what you will make on the interest on your savings. However, in times like these when interest rates on both are very low, it is always worth paying off your debt first and then taking advantage of higher savings interest rates further down the line.
The Psychology of Paying Off Debt vs Saving
Many people argue that rather than looking at a practical approach such as considering interest rates and making calculations, instead, it is better to look at the psychology. Are you the type of person who is likely to spend the money that you save?
Be honest, you will know this yourself! If you are, then a better approach may be to consider your behavioural patterns first. Paying off your debt first is a great way to start changing this behaviour and will mean that you do not have to worry about this again. Plus, with the extra repayments from your debt, you can now put this money towards saving!
Before you make a decision on whether to pay off debt or save, you should always take a look at your full financial picture. You may even consider splitting your money between the two! Choose whichever is going to be right for you and if you still need more help, you may want to look at hiring a financial planner.