Saving Money Versus Paying Off Debt

by Miriam Caldwell | More from this Blogger

28 Nov 2006 10:54 PM

Is it wiser to pay off your debt aggressively or should you begin to put money in savings? How do you decide which is best for your situation? This answer is a tricky one and one that you ultimately will need to decide.

The first step is to make sure that you are no longer living beyond your means. It does not make a lot of sense to be putting five hundred dollars a month into savings while you are charging that much or more a month on your credit card. If you have your spending habits under control, then it is time to look at the question a little bit more closely.

Many experts recommend that you have enough savings set aside to cover most emergencies. For many people this would be between one or two thousand dollars. This amount would cover car repairs, major appliances breaking down and many co-payments for medical insurance. If your situation is unique you may want to change the amount to match your situation.

The next thing you need to look at is your debt and the interest rates that you are paying on it. For example are you being financially wise when your rate of return is three or four percent on your savings, and the interest you are paying on your credit card or car loan is significantly higher than that? It is best to take care of the loans with the high interest rates first, which will save you money in the long run.

When it comes to paying off your home versus saving money, this is a difficult decision. You do want to save for retirement, and put enough money away to cover several months of expenses. At this point you may want to split the extra money between savings and debt repayment.

Related Articles:

5 Ways to Avoid Debt

How to Set Up a Debt Reduction Plan

Learn more about Miriam Caldwell

Miriam is a SAHM mom of three children. She has a daughter who is seven, and two sons, four and two. She loves being a parent and spending time with her children.

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Michelle Vandepas (579) 29 Nov 2006 02:43 PM

Humm.. Thanks Miriam, I've been doing a bit of both - paying off debt, but also putting some aside - especially for Christmas. December is a hard month for us... Three birthdays, Three Children, Five Grandchildren, and two 'adopt a family' situations we support. I appreciate your blog posts!

Miriam Caldwell (8030) 29 Nov 2006 06:25 PM

December is a tough month for us as well. Well it is really December/January. We will have our third this January, but we have one December birthday, one January birthday and Christmas in between. This year my husband kind of flipped a lid when he realized that we were adding the third birthday to the mix. I agree that you need to save for Christmas all year long. Thanks for your comments.

Nola Redd (7081) 29 Nov 2006 07:34 PM

December can be a tough month no matter what your financial standing! LOL. But I agree - we also suffer from post-Christmas stress. Our anniversary is at the end of December, and we have a birthday mid-January and another one Feb. 1st. Yikes.

I think the key word you use is 'paying off debt aggressively'. If you really cut spending and kick it into gear, it's amazing how much debt (and stress) you can get rid of. We were very aggressive last Jan-April and paid off three credit cards at about $8k, and the change in the stress level was amazing! Then we had a layoff and had to dip into our EF, of course.