Should people save money or pay off their debts?

When we find ourselves with extra money or generating sufficient income to meet our needs and have some left over, a common question arises: what is preferable? To save money or pay debts? But of course, by using our head and having a good strategy, we could always arrive at the best decision.

Financial Programs: Paying Debts Before Saving

In a normal course of creating financial programs, payments of debts are many times placed before saving. That’s the short answer. The other longer answer, which shall be reviewed in this article, understands why it is usually advisable to pay debts first and what characteristics to consider.

Benefits of Paying Off Debts Before Saving

Paying off debts before saving has certain benefits and some shortcomings.

Advantages

• Financial Liberty: Repaying debts sooner enables one to extricate themselves from a liability in an individual’s personal budget. Liabilities hinder one from attaining financial liberty and independence.
• Contract Obligations: Debt implies a contract with certain obligations that must be completed.
• Interest Accumulation: Interest is added to the debt amount, meaning that taking a long time to pay off debts results in paying a higher total amount.
• Increased Savings Capacity: Once debts are cleared, the ability to save a lot of money increases greatly. The flow of funds previously spent on interests becomes an amount of money that can be saved and invested.

In summary, the advantages of paying off debts before saving are:

• It relieves you of financial stress and grants you liberty.
• Early repayment of debts costs less money since the total price agreed is paid in installments.
• Your savings capacity increases.

Disadvantages

• Reduced Saving Power: Prioritizing debt over saving means cutting your saving power in the long run. Failure to invest as planned also means you miss out on the compounding factor, which has a large effect on cumulative expected returns.
• Financial Vulnerability: You may find yourself financially vulnerable for any kind of expenses that may arise. When you use your other cash to pay bills, you become locked out in case of emergencies or other unplanned events.

The main disadvantages of postponing savings in favor of paying off debts are:

• Financial vulnerability.
• Smaller scale long-term benefits.

Balancing Debt Repayment and Savings

Taking these disadvantages into consideration, one can easily state that the priority of paying off the debts is not always logical. Paying off one’s debts in a particular sequence allows you to reap all the benefits while mitigating all the risks.

Financial Security During Loan Repayments

Pecuniary security during loan repayments is likely to be nonexistent since clients are not prepared for emergencies due to the lack of liquidity. Thus, the emergency fund should be set up first while paying off debt, according to such or similar priority.

Emergency Fund

An emergency fund should be a determined amount of money saved and put in a piggy bank or a savings account comfortable enough to cater for at least 3-6 months’ livelihood expenses. This fund aims at covering emergencies and one should only use it under emergent circumstances.

Stocking Up

It is recommended to stock up food for the home gradually in case it can last 3-6 months among other considerations. This one is more of a contingency plan but always advisable, and it broadens and diversifies the additional purposes of the emergency fund.

Saving While Paying Debts

This question stems from the second disadvantage highlighted at the beginning of this section. Compounding is where the interest is added to the principal sum to become the new basis for calculating interest for each subsequent period; the longer you can have your money invested, the more the benefits of compounding. Savings that are invested for a longer period of time come with bigger returns possible.

However, it cannot be disputed that you can indeed save when repaying your loans. Savings also go hand in hand with the payment of debt with substantial advantages accrued. Nonetheless, it’s not always wise to save when paying certain debts as it might limit one’s capacity to pay off the debts in the shortest time.

Thus, balance is needed. This leads to questions like: What kinds of uses are appropriate for this money? When should I use all my money to pay my debts? When can I set aside a few pounds for accumulation? How much is to be set aside for savings?

Use a Budget

The greatest way of tracking one’s financial goals is by working with a budget. A budget helps in tracking the performance, financial and otherwise, to achieve specific targets and objectives. From the different ‘looks,’ you get the view on how beneficial it is to concentrate on paying the debts only or a part of the income should be used to save some money.

A budget enables one to formulate a saving plan and also control expenditure, even cutting it down to accumulate more debts and saving capability, and with a mechanism of measuring the monthly accomplishment toward the targets of the formulated budget, required changes can be made.

Conclusion

The answer to whether you should save or pay off debts first is clear: Pay off all, and save nothing was the order of the day. But if you want to get all of them, then adhere to some essential measures.

Creating an emergency fund, setting aside some savings capacity, and paying the existing debts provides protection in case of an emergency and saves for the long term from the earliest possible timeframe. Thus, it is possible to work out an efficient financial plan, which enables both securing investments and gaining more earnings.