To regain a healthy financial situation, paying off debt and developing a cushioned savings account are both important. But what financial experts constantly debate over is which one should take first priority. If someone living paycheck-to-paycheck were to suddenly acquire money (whether a lump sum or an increase in pay from a new or secondary job), where should that extra income go? While both tasks are necessary in the long run, we’ve come up with a couple questions to ask yourself before you decide where to invest the extra cash.
Do I have an emergency savings?
Did you know that, according to CreditDonkey.com, 41% of Americans have less than $500 in their emergency fund? No matter what your financial situation is, everyone should have something stored in a savings account, specific for those odd emergency expenses. Whether it seems more financially savvy to pay off debt or not, having a financial cushion for things like root canals, car repairs or hospital visits can mean not having to throw more debt back on top of your credit card.
Is my debt’s interest higher than my savings account’s interest?
If you do have an emergency fund, then this is when it’s time to think about the math – if you’re dishing out interest on a credit card at 22%, but your savings account is only earning you 2%, clearly it’s a wise decision to pay off some of your debt. Strive to eliminate your balance as quickly as possible so that when you do start saving, your money isn’t wasted. However, if you have a low rate loan, like a low-interest student loan, it might be wise to start saving sooner rather than later.
Do I have a big purchase coming up?
Just because something makes financial sense, doesn’t mean it could be the perfect solution for your situation. Do you have plans to open a business, buy a home or even travel? These sorts of things require a big amount of cash, and while it might be nice to go into your new home debt free, if you don’t have the money for a down payment, you’ll have to wait even longer to move.
What do you think – should you save first, or get rid of your debt? Tell us about it in the comments below!
If you like this article, be sure to check out “3 Steps to Digging Out of Debt.”