Many people want to know: Should you pay off your debt or save money? The answer is both. If you have debt, it’s best to pay it off as quickly as possible.
After all, when you have debt, your lender is owed money, and it’s a good idea to get that money back as soon as possible. It’s also best to put your money towards something that will grow and help you build wealth.
That’s why you have debt in the first place. So, should you put your money towards your debt or towards saving money? If you have debt and are considering your options, here’s what you need to know.
Debt is when you borrow money to help fund your lifestyle. For example, if you have a $10,000 loan at 12%, then you owe $1,200. That $10,000 loan is your debt.
You’re not actually earning the money that you’re repaying that loan with, so it’s important to understand the difference between debt and savings. Since debt is when you borrow money, it’s also important to understand what it is exactly that you’re borrowing.
Should You Pay Off Debt or Save Money?
There are pros and cons to both options, so it’s up to you to decide which is better for you. While some financial pundits will tell you that you should always pay off your debt, that isn’t necessarily the case.
After all, if you have too much debt, it can greatly limit your ability to save and invest money. So, should you pay off your debt or save money? It depends on you, the person. If you have debt, and you’re considering your options, here’s what you need to know.
Why Paying Off Debt Is Better
If you have debt and are considering your options, here’s what you need to know. Why should you pay off your debt? Well, there are a few reasons why paying off your debt is a good idea.
It takes less time. Since you don’t have to devote as much time to paying off your debt as you do to saving money, you can put your efforts elsewhere.
It’s safer. Borrowing money is inherently risky, and the more you borrow, the more unsafe it becomes. If the economy takes a downturn, the government can seize and freeze all of your assets. With debt, that’s inevitable.
You get more money back. The faster you can pay off your debt, the more money you’ll get back from your lender.
Why Saving Money Is Better
If you have debt and are considering your options, here’s what you need to know. Why should you save money? Well, there are a few reasons why saving money is a good idea.
It’s more flexible. Saving money is flexible. It can be used for all kinds of different things, so it can be used for any purpose. If you want to buy a new car, a house, or open a business, you can do that with your savings.
It helps protect you. The more you have, the less likely it is that something will happen to you. If something were to happen to you, your loved ones can take care of themselves.
It’s more effective. The more you save, the more money you’ll have. That means you’ll have more options when it comes to investing your money.
There are pros and cons to both options, so it’s up to you to decide which is better for you. If you have debt and are considering your options, here’s what you need to know.
If you want to pay off your debt as quickly as possible, you should try to make the minimum monthly payments. After all, it’s usually much easier to pay $15 or $20 every month than it is to pay $300 or $400 every month.
If you can pay less, that’s great, but if you can’t, don’t worry too much. If you want to save money and build wealth, there are a few things you can do. First, work as many hours as you can.
Second, look for ways to increase your income. And lastly, try to cut any unnecessary costs out of your life, giving you a higher percentage of disposable income towards both paying your debt repayments, and putting some away in a savings account.
“Consumers can and should do both.” Even if you're working on paying down debt, building a healthy savings fund can help you avoid adding to that debt. Having an emergency fund reduces the financial burden when the unexpected happens, even if you start with a small amount and save slowly.
If you have a substantial amount of high-interest debt, consider paying it down before saving for a house. Any interest – but especially high-interest debt – can significantly extend your debt repayment timeline and eat away at the money you could be saving for a home.
A less aggressive investment mix, meaning one with a lower allocation to stocks, may be expected to result in slightly lower returns (on average) over the long run. And with slightly lower expected returns on investing, paying down debt comes out ahead even at slightly lower interest rates.
Many people believe that having no debt is ideal, but in many situations, debt can actually be considered good for your finances if it helps you build wealth. For example, if you cannot afford to buy a home with cash, you may go into debt with a mortgage.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Whether you're paying off a loan with a lump sum or you plan to chip away at it with larger payments, paying off your loan faster will likely mean tightening up your budget. Consider where you'll get the money to pay off your debt — is it being diverted from your retirement savings plan?
$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month. However, you don't have to accept decades of credit card debt. There are a few things you can do to pay your debt off faster - potentially saving thousands of dollars in the process.
This repayment strategy, sometimes called the avalanche method, prioritizes your debts from the highest interest rate to the lowest. First, you'll pay off your balance with the highest interest rate, followed by your next-highest interest rate and so on.
“Shark Tank” investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
Wealthy people aren't afraid of borrowing. But they typically don't borrow money to live beyond their means or because they failed to save for emergencies or make a plan to cover expenses. Instead, rich people tend to use debt as a tool to help them build more wealth.
How do billionaires live off loans? By pledging their appreciating assets as collateral, billionaires are able to live off their loans as long as their loan payments don't exceed their investment gains.
What percentage of America is debt-free? According to that same Experian study, less than 25% of American households are debt-free. This figure may be small for a variety of reasons, particularly because of the high number of home mortgages and auto loans many Americans have.
The average debt an American owes is $104,215 across mortgage loans, home equity lines of credit, auto loans, credit card debt, student loan debt, and other debts like personal loans. Data from Experian breaks down the average debt a consumer holds based on type, age, credit score, and state.
If you're planning to save by paying down debt, you're in good company: getting out of debt is the #3 savings goal people select when taking the America Saves Pledge. That makes sense because debts can keep you from building wealth.
There's a good reason to pay off your highest interest debt first — it's the debt costing you the most. Credit cards with higher-than-average APRs can be especially hard to pay off.
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