Saving Vs. Paying Off Your Debt During The Pandemic: Which Is A Better Approach?
The age-old question of saving up or paying for your debt has been raging for centuries and will always be a relevant topic in financial management to this very day. In a world full of uncertainty, should we pay off our debt, or should we be saving up for the future? We’ll be weighing in on what each choice can do for you.
The Pros Of Paying Off Your Debt
There are a variety of reasons why you should start paying off your debt as early as possible:
1 You can reduce your accumulating interest over time. For most individuals that have high-interest debt, this could drag on if not paid on time.
- This will help improve your credit score.
- After you’ve paid off your debt, you won’t have to worry about anything besides saving.
- You’ll feel better knowing that there’s no more mental burden.
You don’t necessarily need to drag out your debt since this can lead to even more interest. The best way of ensuring that you’re expediting the process of paying off debt is by getting into a deal that will benefit you in the long-run. This is especially true when getting a property loan. Homes will always be a necessity, and you must acquire a loan that has a reasonable interest rate. Fortunately, there are trusted mortgage lenders that are known for their low-interest rates and hassle-free processes.
The Pros of Saving Up For The Future
Let’s face it: we all want to save up for our future, especially when we have wants and necessities in mind. However, having standing debt can hinder the process of savings. But you can always focus on your savings while making minimum spending on your debt.
Some of the advantages to saving up as early as possible is:
- The earlier you save up for your future, the more you’ll be able to increase your savings with compounding interest exponentially.
- By saving, you’ll be able to achieve your long-term goals on your timeline, as opposed to waiting to repay your debt in full.
- Having savings that are accessible, which can help you take on any “debt” and expense if a certain emergency manifests.
One of the best reasons to start saving up funds is because of the compound interest. This refers to the money you’re earning through your savings account, your money market account, and even your investments. The more you can compound, the more you’ll be able to save.
Waiting for around five to 10 years is an excellent way of making a fair amount of difference. Although you might not see any significance in the short-term, you’ll see a difference from saving up around $5,000 a year starting from the ages of 23 – 25.
Having savings can also create a “safety” net that can serve as a buffer every time there are unexpected repairs for your home or your car. Most individuals that don’t have a safety net are forced to take in debt.
Can You Do Both?
Well, it’s possible to do both at the same time. However, you’ll need to effectively manage your finances to achieve both. This will require a reasonable degree of strategy, planning, and showing a bit of restraint to how you spend.
The first thing that you should do is review your budget and set aside the amount that you’ll be paying towards your debt monthly. Is there any way for you to have a less expensive monthly payment? How will you be able to pay off your debt in a more efficient manner? Some experts would transfer some of their debt from a credit card with high interest to a new card with a 0% APR. This can reduce any accumulation in part and funnel more funds towards your balance.
The next thing on your list is freeing up your budget by focusing on monthly expenses that are “temporary.” These are usually in the form of loan balances that can be paid in the next two to five months. Eliminating these will mean that you will have more breathing space to save up.
Whatever the amount for your budget may be, you should divide both on your debt and what goes into your savings. For instance, if you’ve got; 500 dollars surplus while having a long-term goal of an emergency fund, then you can have at least $300 for your savings while placing the $200 for your debt. This way, you will be accelerating your savings and paying off your debt faster.
Whatever your decision may be, you have to make sacrifices by putting your money to work. This is the best way to financial independence.
There’s no right or wrong answer for this situation since this is a very situational matter and depends on what your long-term goals are. However, most experts would say that you should eliminate your debt as soon as possible. Having debt that drags on for years can hinder your financial goals. At the same time, you shouldn’t wait to save up. The key to financial freedom is taking a step back, planning things out, and balancing your debt and savings.