Saving and investing is the key to improving your financial stability and achieving long-term financial goals. But so is paying down your debt over time. Many consumers are stuck trying to balance these opposing forces when choosing how to manage their money, and often aren’t sure when and where to prioritize debt repayment vs. personal savings.
Ultimately, the decision of whether to pay off debt, save money, or attempt both at once is a personal decision based on your current finances and your long-term goals. But there are certain questions you should ask yourself, as well as certain risks and opportunities to keep in mind, as you weigh your options and adjust your financial strategies accordingly.
Looking for help? Read on for tips on how to balance debt repaying and personal savings, as well as strategies to prioritize your financial goals while avoiding debt in the future.
Are You Prepared for a Financial Emergency?
When choosing how to manage your money, and where to place your funds, it’s important to first consider how much financial cushion you have in the event of unexpected costs, such as medical expenses, car repairs, or a loss of income.
An emergency fund is one of the most important financial assets you can have, giving you security to cover those unexpected costs without resorting to credit cards, loans or other forms of debt. Since these funds are essentially a safeguard against being forced to rely on debt to face down a financial emergency, consumers are encouraged to prioritize an emergency fund over most other financial goals.
Although the high interest charged by credit cards may motivate you to pay down your debt faster, while building up emergency funds at a slower rate, aim to increase your emergency funds steadily over time. While experts recommend creating an emergency fund equivalent to three to six months of your living expenses, this may not be achievable right away. If not, make modest contributions that you can afford. Remember that every little bit can make a difference.
How to Manage Loans Better—And Pay Down Your Debt
Many consumers struggle to prioritize saving when a cloud of debt is hanging over their head. If this is the case for you, or if you’re worried that debt is your bigger financial concern right now, it’s important to create a plan for managing your loans and other debt to reduce their size and increase your comfort with saving.
Here are some strategies to help you manage loans and reduce that debt:
Stop using credit cards and other debt, at least temporarily, while you pay off your balances. This will stop you from adding to these debt levels every month, making it easier to pay off your debt faster.
If you’re struggling with minimum payments, use the snowball method. The snowball method of debt repayment involves making minimum payments for all of your debts, but then putting all of your excess funds toward the debts with the smallest balance. A simple snowball debt Google Sheet tool can help you organize all of these debts, prioritize repayments for the smallest balances, and gradually pay down these debts.
If interest charges are piling up, consider the avalanche method. As an alternative to the snowball method, the avalanche method prioritizes payment to the debts with the highest interest rate. Over the long run, this will reduce the amount of interest paid for these debts.
Use balance transfers and loan consolidation to better manage your debt. These loans and financial tools can organize your debt, fixed your interest costs, and create a clear plan for paying off debt—while also potentially giving your financial space to make savings contributions.
Saving and Investing: What to Do After You’re Debt-Free
Whether you’re fully debt-free or have simply paid down the big debts causing you financial stress, reduced debt can make it more practical to save money and build toward larger financial goals.
In addition to creating an emergency fund, consider the following saving and investing steps:
Identify financial goals that require saving. This could be a downpayment for a home, college tuition for your children, a future vehicle purchase you would like to make without financing, a dream vacation, or other goals. Figure out a goal amount, and then create a plan for how much you will save every month toward those goals.
Contribute to retirement accounts. This includes a 401(k) offered by your employer, as well as other retirement accounts such as a Roth IRA.
Place savings into an interest-bearing account. Your emergency fund and other savings should be in a savings or money market account that generates interest and pays dividends.
Four Ways to Avoid Debt
Looking for ways to stay out of debt in the future? As you pay off debt and prioritize savings, you can steer clear of more costly forms of debt through the following strategies:
Continue growing your emergency fund. The larger this fund becomes, the more protected you will be in the event of financial uncertainties—and the less likely you will be to seek out debt to address unexpected bills.
Spend less than you earn. By controlling your spending and creating some financial buffer, you will be well-positioned to absorb certain expenses that might otherwise be covered with debt.
Reduce your reliance on debt, such as credit cards and auto loans. Paying in cash or with debit cards—and putting down a larger downpayment, if not buying an entire vehicle in cash—will protect you from these debt payments.
Keep some of your investments in non-retirement accounts. As you save and invest, retirement account contributions—while offering excellent tax benefits—will also restrict you from accessing those contributions in an emergency. While you should continue making contributions to retirement accounts, consider placing some of your investments into joint investment accounts that can be liquidated and withdrawn penalty-free.
While debt repayment and saving are both essential goals every consumer should consider, the right balance of these goals is always dependent on your current finances, as well as your future goals. If you would like help planning out how to prioritize these efforts, seek out a financial planner today.
