If you haven’t weren’t raised with a good understanding of finances, it can feel really overwhelming when you find yourself in a tough financial spot. One of the major questions everyone asks is, “Should I save money or pay off debt?” In this post, we’re going to break down just how you should handle your debt and savings and we’ll walk you through which one you should do first.
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The first and most important thing you need to do is look at how much debt you have. This might require some work on your part. A lot of people don’t actually realize just how much debt they have.
Not knowing your debt makes it impossible to create a solid plan for debt payoff.
Debt is considered anything that you are making payments on. This goes double for things that you are paying interest on.
You are in debt if you have things like:
Anything that you haven’t paid in full and are making payments on falls into the category of debt.
The only one of these debts that we will not be focusing on is mortgage debt. Out of all of these, a mortgage is the only debt that can prove to be beneficial to you because it will most likely only increase in value and therefore make you a profit.
Having a lot of major debt that you are struggling to pay off could be seriously affecting your credit score. If you think you are in need of credit repair help, grab Lexinton Law’s free eBook and credit consultation.
To start calculating your debt, you are going to need to come up with 3 separate numbers:
Here is a free printout to help you organize your debt calculations. Debt Calculator.
Often times people with a lot of significant debt have already worked to build up safe, secure savings. This is a great idea, but consider that you have $10,000 in savings and a $10,000 outstanding credit card balance.
Continuing to make your monthly payments will cost you $372 per month and (according to this Credit Karma calculation,) almost $3,400 in interest.
So what if you took that $10,000, paid off your debt, and instead put that $372 minimum into savings like the Savings Builder savings account?
In three years instead of having lost over $3,000, you’ll have made almost $4,000 in compound interest according to Bank Rate’s simple savings calculator.
So maybe you’re saying to yourself, “that’s great, but I don’t even have $100 saved let alone $10,000.” It’s all good.
If you don’t have a savings in place for yourself yet, before you begin paying off any debt the first thing you need to do is build a secure, $1,000 emergency fund savings.
While I love the Savings Builder savings account because it pays you to save, for your $1,000 emergency fund, I recommend keeping this saved at your local bank for easy access during emergencies.
Having an emergency fund in place before you begin a debt payoff plan is crucial.
Let’s face it…something is going to go wrong. Some emergency is going to present itself and you don’t want to be left penniless. You also don’t want to feel so stuck that you turn to a credit card to help you out of the situation.
So, when you are done building a solid emergency fund, it’s time to tackle debt.
Having debt is like a life sucking pain in the butt. Let’s get down to the basics of why is really stinks:
When it comes to debt payoff, there really is no wrong way to do it. As long as you do it. There are, however, different expert opinions on how to tackle debt the right way.
Some people are quick to turn away from Dave’s methods because the idea of not saving it too scary. When it comes to this, there are basically 2 schools of thought:
During debt payoff or savings, there will no doubt be times of struggle. It’s so important to remember to keep going. Every little bit adds to the big picture.