Is is better to save or pay down your debt?

Question

Should I work on paying down my debt or should I save the money? Which is better?

Answer 1

My answer to you is yes and yes.  You should do both. Here is a way to accomplish both of your goals and end up wralthy.

1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an "emergency fund" category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don't even have to worry about it. You must cut your spending and live on less than you make.

2.First get current on all of you debts (if you aren't now) and make no  late payments. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.

3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:

To start :

Debt #1 (highest interest): minimum payment+ extra payment

Debt #2 (middle interest): minimum payment

Debt #3(lowest interest): minimum payment

Debt #1: paid off

Debt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra payment

Debt #3: minimum payment

Debt #1: paid off

Debt #2: paid off

Debt #3:Mimimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.

That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.

4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.

5a. When you have your emergency fund in place, add a category for "fun" to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.

5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free money. Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.

5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.

Answer 2

This is general advice without knowing your specific circumstances...

1. Start an emergency fund (3-6 months of expenses).

2. 401k (at least up to company match) if you have one.

3. Pay down debt.

4. Save additional (after you've funded emergency fund & retirement)

Answer 3

Save up a 1000 emergency fund. Then start knocking the heck out of your debts.  

Check out Dave Ramsey. He is a financial counselor that believes in being debt free. He has a strategy for doing that. He has a radio show on Talk Radio and several books. www.daveramsey.com

Answer 4

I suggest paying down your debt. You are paying money out typically over 9-10 percent but the best savings accounts out there only offer max 5%. I think it is awesome being 100 percent debt free and now im able to get into more "risky" investments like mutual funds that can make some good money...Keep about 1000 dollars in a "just in case" fund while you are paying down debt so you arent caught with your pants down when you need money,,, you dont want to have to go right back into debt after you worked hard to get out.  

Answer 5

Generally speaking, it is ussually better to pay down debt before savings.  Especially if the debt has a high interest rate.

However...It depends what the interest rates/rates of return are and whether it's a good debt or a bad debt or whether you can make it good debt or not. (Good debt=tax deductible debt, Bad debt= non tax deductible debt).

If you are going to make at least 3% more from the saving than you are paying in interest in the debt, save and use the money you make to pay off your debt.  The 3% covers your inflation...anything over that margin is more or less profit.  Meet with a Financial Advisor or someone that truly understands debt, savings and leveraging for the best advice.   Without any details it's imppossible to fully answer your question correctly and accurately.

Anyone that says "Always pay down debt...debt is bad" doesn't understand how debt works.  If debt is always bad, explain why the most profitable companies and countries in the world also have millions if not billions or trillions of dollars in debt?  Becuase some time it's better to borrow money to enhance your return (it's called Leveraging).

Answer 6

Pay down your debt. Typically your debt has a higher interest rate on it than you can earn so you get a better return paying down debt.