Are you trying to figure out if you should pay off debt or save money? Read this article for your guide for what to do first.
During the 2008 financial crisis, caused by the housing bubble, U.S. consumer debt reached a whopping $13 trillion USD. It took a long time for many Americans to come back from the recession. Now, people across the country are facing similar hardships thanks to coronavirus and COVID-19, and it shows.
To wit, the consumer debt total has skyrocketed past that previous figure, soaring to a record $14 trillion. It’s no exaggeration to say that plenty of us are in big trouble, money-wise.
You may be wondering if you should pay off debt or save for the future. Let’s take a closer look at the pros and cons of each approach.
Debt Isn’t Necessarily a Disaster
A lot of folks think that debt is a dirty word. Being in debt and unable to pay, of course, isn’t a good situation. However, some types of debt are better than others. In fact, carrying some amount of debt, and paying it off wisely, will give you a better credit score than if you have no debt whatsoever. Crazy, right?
Don’t be in a rush to pay off your debt simply to get out from under those obligations. In many cases, it may be smarter to sock some money away for the future.
Scenarios When It Makes Sense to Save
Here are a couple of situations in which it’s almost always better to choose saving over paying debt. (That is, if you have to make the choice. If you can swing both, then do so.)
First, your debt carries low interest rates. Maybe you have credit cards with great rates. Or perhaps you have consolidated your debt through a program like Debthunch to pay less interest on all your loans. Either way, you’re wise to save money.
Second, you can put savings into a high-yield account. Transferring your earnings to your bank’s savings account might not do much for your wallet. A 401(k) plan with employer matching, on the other hand, will net you more money over the long term.
Third, you have no emergency fund. Think this through. Let’s say you pay down at least part of your debt, interest and all. Then another economic emergency hits. Maybe it’s a second wave of COVID cases, you lose your job, or you are injured and incur high hospital bills you can’t pay.
You’re going to have to rack up that credit card debt again. That means paying even more interest over time. Unless, that is, you have an emergency fund to tap into.
Should You Pay Off Debt or Save?
In those three instances, saving money makes the most sense. Most other times, however, you’ll want to pay down your credit cards and other loans quickly. That’s because high interest rates can really send you into a downward spiral of debt.
We hope that learning which is better, to pay off debt or save, was helpful to you! If so, check out the Finance section of our blog for more great advice!