Photo (cc) by 401(K) 2013
If you’re like many Americans, you have both debt and savings.
So here’s a question: Should you continue to keep your money in savings, or should you spend your stash to pay off your debt?
It may seem like an uncomplicated question, but the answer is anything but simple.
“Like everything else in life, this decision is one of balance, not of absolutes,” Michael Rubin, president of Portsmouth, N.H.-based Total Candor, a provider of financial education, told Bankrate.
According to U.S. News & World Report, working through these questions can help you figure out what financial move is best for you:
- Do you have emergency savings? Most financial experts agree that emergency savings are a necessity. “Start with at least $1,000 in cash,” Forbes said. It’s recommended that you have a minimum of three months of expenses saved in an account.
- How costly is your debt? Compile a list of each debt and its interest rate. “If the interest rate is over 7 percent, you’re likely to save more in interest by paying down the debt than you would earn by investing the money,” Forbes said.
- Is extra money coming your way? “If you expect to receive an additional windfall in the near future, in the form of a payday check, gift from parents, tax refund or any other income boost, then you have a little more flexibility because you’ll have more money to work with soon, and perhaps you can pay off debt as well as save,” U.S. News & World Report wrote.
- What are your financial goals? If you have plans that require big bucks, like starting a new business or purchasing a house, it might make more sense to keep your money in savings. However, “paying off debt can also be helpful because then you can embark on these new financial adventures without the added weight of old loans,” U.S. News & World Report said.
Money Talks News’ Stacy Johnson examined a similar question in this video about whether to save for retirement or pay down debt.
In the end, it might make the most sense to find a balance between saving your money and paying off your debts. According to Bankrate, personal finance author Paula Langguth Ryan promotes the dual approach, even though you may be able to net more money by paying off the high-interest debt before you save.
However, she says any short-term gain will be lost if you revert to using a credit card to cover emergencies.
“You just replace old debt with new debt,” she says.
Creating an emergency fund is the only way to break the debt cycle, she says. Without such a cushion, chances are good that you will fall back into debt as soon as you’re in a financial pinch, no matter how much money you’re throwing at your current debt.
How have you approached saving versus paying off debt? Share your comments below or on our Facebook page.