Should you pay off debt or save money? It’s a question millions of women have every day. In today’s economy with millions of people unemployed or underemployed, the question is even more prevalent.
How do you achieve financial freedom for women when you have debt and no savings?
Should you prioritize one over the other or do both?
Check out the money tips below to help you decide.
The Difference Between Paying off Debt and Saving Money
Paying off debt and saving money have similarities.
Here’s another way to look at it.
What does it cost you to have the debt? If you have high-interest credit card debt, for example, you likely pay a lot more in interest than you could save. Let’s say your credit card has a 19% interest rate. You’ll never get a 19% return on your investment if you saved that money. Even if you invested it in the stock market or real estate, a consistent 19% return may be unachievable.
If you saved rather than paid off your debt, you’d lose money. It makes sense to pay off the debt, first then, right?
Not so fast.
Saving money prevents further debt. What would happen if you paid all your ‘extra’ money toward your debt and had no savings? If you have an emergency, you’d be right back where you started – racking up your credit card debt to cover the cost of the emergency.
How Much Should you Save Before Paying off Debt?
If you have no savings, prioritize saving something. Start with a $1,000 emergency fund. This helps you through basic (and small) emergencies. If your car needs a quick repair or your refrigerator dies, you can cover the expenses without using credit cards.
Eventually, you should strive for an emergency fund with three to six months of monthly expenses in it. But for now, focus on the $1,000.
You don’t need to save $1,000 at once. Figure out how much you can comfortably save each month, getting you to the $1,000 emergency fund in a short amount of time.
Pay off Debt – When to Prioritize It
Take inventory of your debts. Look at the balances, but also the APR, as it’s your determining factor. If you have low APR credit cards (or even 0% APRs), paying off debt doesn’t have to be a priority. Of course, you must pay it off eventually but focus on your savings when interest costs are low.
If you have high-interest credit cards or personal loan debt, focus there, after you have $1,000 saved. Figure out your expendable income (money left after paying your necessities) and put it toward your debts to lower the amount you pay toward interest in the long run.
Create a plan for your debt payoff, don’t just wing it.
Two popular debt payoff strategies are the debt snowball and debt avalanche methods. The debt snowball prioritizes low balance debts, paying them off first, and building momentum. The debt avalanche method attacks high-interest credit card debt first. It progresses slowly but saves you more in interest.
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Saving Money – When to Prioritize It
It may seem weird to save money when you have debts, but sometimes financial freedom for women is achieved by saving.
- Are your debt interest rates low?
- Do you have an emergency fund saved?
- Do you have retirement savings?
Why would we bring up retirement savings when you’re getting out of debt? Believe it or not, they go hand-in-hand. You need retirement savings as much as you must get out of debt. What would happen if you entered retirement in debt? It could happen. Without savings, you can’t cover your daily cost of living or your debts.
If your company offers a 401K and matches your contributions to a certain amount, at the very least, save that amount each year and get the ‘free money’ your employer provides. If you don’t have an employer-sponsored 401K, start an IRA and save as much as you can up to the 2020 limit of $6,000.
How to Pay Off Debt and Save Money at the Same Time
In a perfect world, you’ll pay off debt and save money. It sounds complicated, but it’s necessary.
You need a budget to do this. A budget gives you a clear cut line or the amount you have for paying off debt and saving. Let’s say you determine you have an extra $600 each month. Split the $600 up between your debt and savings.
Initially, focus on your savings, at least until you get to $1,000. With that baseline set, you can focus on your debt payoff strategy again, but don’t ignore your savings. If it works, split it down the middle – 50/50. In this case, you’d pay $300 to your debts and put $300 in savings.
As you work through your debts and increase your savings, you’ll see where you should adjust. Some months you may save more than you pay toward debts, and other months will be the other way around.
Should you Pay off Debt with your Savings?
Never pay your debts with your savings. Put your emergency fund in an account you can’t access easily. An online bank account works best. This eliminates the urge to pull money from savings to pay off the pesky high-interest debt.
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Keeping a plan in place helps eliminate this risk. Choose a debt payoff method and stick to it, while keeping with your savings plan too.
If there’s one thing we all need as we navigate the pandemic and the ups and downs the economy will likely keep taking, it’s savings. Not saving puts you at risk of the vicious credit card cycle all over again. With dedication and consistency, you’ll get out of debt and save money, achieving financial freedom quicker than you thought.