SAVE MONEY OR PAY OFF DEBT - HOW TO KNOW THE BEST OPTION

Book Your Free, Virtual Financial Coaching Consultation

Overview

It’s a question as old as finance: save money or pay off debt? We know that debt = risk, and we don’t like risk. But, at the same time, the idea of going without saving scares us. What can we do? In my personal opinion, it’s not necessarily an “either/or” question.

If you want to save money, the most efficient way is to free up money to save. The best way to free up money to save is by eliminating unnecessary payments. The most unnecessary payments in your budget are probably consumer debt payments. So, pause your saving, pay off your debts, and then you’ll be free to actually increase your saving.

Let’s dig into the logic behind this a little more by breaking the statement into four facts.

Fact #1: You Want To Save Money

I mean, who doesn’t want to save money? Somehow it seems we all innately know that long-term success means building up some savings in the short-term. We accomplish this through investing in retirement funds (not technically “saving,” but for our purposes we’ll lump it in), building up emergency funds, and earmarking money for particular goals in the form of sinking funds.

See, you know that eventually, you’ll need to replace your car. When you see that time drawing closer, you’ll need to be setting aside money each month for that purpose. That means creating and funding a sinking fund. This ensures that when you pull out of the lot with your new car, you leave with a car you love instead of a car payment. This same principle applies to any goal.

This is all great! And the more money you have available to funnel into those goals, the better. Enter debt.

Learn About Creating Sinking Funds

Fact #2: Debt Keeps You From Maximizing Your Savings

If you have any debts and budget regularly, you should have a pretty good idea of what your monthly debt payments are. And you probably also have a pretty good idea of how long you’re going to be stuck in those payments.

These payments are stealing from your savings! I say “stealing” because you’re not only paying back the money you borrowed, but also interest on that money. That’s how lenders make the lending worth their time. That’s why they can lend money and you need to borrow it. They’ve figured out the system that you’ve become trapped in.

Imagine how much faster you could save for your goals if all the money you were currently sending to debt payments was redirected towards funding your financial objectives.

No matter how small your debt payments are, they are holding you back.

Why Debt Stinks

Fact #3: Paying Off Debt By Pausing Savings Is Okay

But how do you get rid of the payments quickly? You’ve got to pay way, way beyond the minimum payments. And you need a plan of some sort.

Step one of any plan should probably be to make the decision to pause your savings (and investing) so that all your focus can be on achieving this one goal. You do this knowing that you will quickly get back to saving and investing, and that when you do, you’ll be able to do it better.

This savings “pause” is just a short-term strategy. With hyper focus, you can knock out your debts fairly quickly with all your financial guns aimed at them.

I’ve written about a few strategies for debt elimination previously. Check those out below.

Debt Snowball – Debt Pay Off Strategy

Debt Avalanche – Debt Pay Off Strategy

Fact #4: With Debt Payments Gone, Savings Goals Can Accelerate

And finally, as I’ve alluded to above, once your debt payments are gone, you can begin maximizing your saving. That means quickly and efficiently reaching larger financial goals.

Let’s again take the car example. With debt payments in the budget, it might take you two or three years to save up to pay cash for a car. Depending on what your debt payments looked like, you might be able to knock that down to only a few months once they’re gone!

With debt gone, budget flexibility increases. In short, the quickest way to maximize savings is most likely going to be to eliminate your debts first.

Save Money Or Pay Off Debt – Conclusion

The “facts” above represent the exact train of thought I followed when my wife and I made the decision to focus on eliminating debt over savings for a brief period of time. We’ve never regretted this decision. Now, we can quickly set and reach a financial goal. Why? Because instead of sending our money to a lender, we can direct it wherever its needed.

So, save money or pay off debt? One last time, let’s walk through my thinking:

And as always, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!

Pause your saving, pay off your debts, and then you’ll be free to actually increase your saving.

Bio
Latest Posts

Alex

Hello, my name is Alex! I'm a public school teacher who has achieved some big financial goals just by getting control of my money using some simple strategies like using a monthly budget. Now I'd like to share what I've learned with you. Welcome to "Bank on a Budget!"