Pay Off Debt or Save Money - How To Decide

It's always challenging to decide whether you should pay off a debt or save for an emergency! And you are not alone to be stuck in this dilemma regarding your fund and budget.

What Exactly Is A Rule Of Thumb For Debt Payoff Versus Emergency Savings?

As the debt keeps increasing with time, it's essential to save money to pay it off. But also you should have enough funds to satisfy your needs other than the debt. An all-or-nothing option should not exist in this situation.

One good thing you can do is pay extra money in the name of debt rather than the minimum amount. Suppose $100 is your debt amount to be paid per month, try to spend $10 additionally if you can. While doing this, you can keep the rest of the amount to yourself as savings.

Here Is How You Decide Whether You Should Pay The Debt Off Or Save Money

You cannot just hold onto one solution and expect that it works for all the same way! However, you can decide the priorities that simplify the whole situation.

Here are some questions you can ask yourself:

What is my career situation?

The first thing you need to pay any debt is security in your job. If you are aggressively keeping your debts and then lose the job for some reason, nothing will be left! Having some savings is always good to breathe a little more.

If you are ever in a situation when you lose the job and have no savings, you will settle with whatever opportunity you get. It can be any low-paying job which you never asked for.

How much emergency saving do I have?

A general rule of thumb that decides the emergency saving you need is to divide the annual income by $10,000. Whatever outcome you get is the amount you should start saving until you reach the next job.

The best way to do that is to lessen your monthly contributions and manage your expenses within budget.

Do I even need another kind of savings?

Unexpected expenses are challenging, but so are the expected ones. Even if people know that they will be required to spend a particular amount in the coming years, they fail to manage the money.

Any expenses scheduled like home repair are appliances can be troublesome if you fail to arrange the money. In the end, it all comes down to management! So it is important to manage well and save for all situations possible.

What's The Type Of Debt That I'm Paying?

Knowing the kind of debt you are paying is essential as the interest rates vary. You need to be extra careful if you are indebted by a pawnshop loan, payday, or car title as they have an APR of over 100%.

There are also many low-interest debts like federal student loans or mortgage cars, which charge lesser interest. You can plan your budget accordingly by looking at the interest.