The topic of improving financial health is always a conversation starter at Partners Federal Credit Union. Two important indicators of financial health are money saved vs. money owed.
Are you like most people and owe money without having funds tucked away in savings? Not to worry, we’ll guide you in terms of when to pay off debt and when you should save your money.
When you’re living paycheck-to-paycheck and have little going towards savings, where do you turn when you have an unexpected expense? Oftentimes, credit cards save the day. Your immediate problem is solved, but at the end of the day, your savings is still small but your debt has increased.
If you can relate to this situation, it sounds like you should not only save money for emergencies but also pay down your debt. Having a savings cushion will help you avoid further debt when an unexpected expense arrives.
However, if you have a solid savings account, paying off debt can be your primary focus. Conversely, if the opposite is true — you’re not carrying a lot of debt, but you have little or no savings — then savings can be your focus.
Figure Out Your Situation
Here are some strategies to help you assess your debt versus savings situation and plan to tackle them.
First, figure out exactly how much you owe. No matter how you feel about that number, write it down so you know what your payoff goal should be.
Next, set a savings goal. If you’re unsure what that should be, pick a round number, such as $1,000. If you have that amount in savings, look at a higher number, such as six months of living expenses.
Then, you’ll need to get a good handle on your budget and cash flow. Figure out what you need each month to meet your obligations and how much you can put toward your savings and debt.
Put Your Plan into Action
Once you know how much you owe, how much you have saved, and whether you need to focus on debt, savings, or both, you can allocate your funds toward your goals.
If you have little or no savings, then it might be best to put more than half of your allocated funds toward your savings goal until it’s been reached. For example, if you have $150 to put toward debt and savings each month and your savings goal is $1,000, consider putting $100 in savings and applying $50 to your debt until your savings balance is $1,000. Once you achieve that goal, again assess your debt and decide how to allocate your $150 going forward. You may decide that debt is the more pressing goal and put more money towards debt and the rest in savings, or you can save it and slowly pay off debt. No matter how you slice it, make sure it’s manageable for you and your lifestyle.
How do you decide which debts to pay off? There are several ways to pay down debt. You could choose to pay off the highest interest rate debt first, paying only the minimum on everything except that highest interest rate card or loan. Or you can pay extra to the smallest debt first, then move on to the next smallest until you’ve paid off your debts. The “smallest first” option can give you the quickest success, so that option might be best for you if you’re motivated by success. Paying off the highest interest rate debt first will help you pay less interest in the end, so if interest savings are a priority, then this option might work best for you. If your debts are all similar in interest rate and size, then paying equal amounts in addition to minimum payments might be the right choice. The key is to be consistent; form a plan and execute it.
If you have a lot of high-interest debt, you might benefit from using a personal loan to pay it off and then pay off the personal loan. Interest rates are often lower, and consolidating many payments into one can make your life a lot easier. If you use a personal loan, continue to use credit wisely. It’s tempting, but try not to pay off your credit cards with a personal loan and then increase the balance once more by going on a shopping spree. This method may buy temporary happiness, but keeping your debt down and your savings high will provide forever happiness once managed correctly.
Once you reach these goals, what other financial dreams can you achieve?