Save money or pay off debt
The average millennial carries more college debt than any previous generation, but debt and other financial problems aren’t confined to millennials alone. According to a recent poll, 40% of Americans can’t afford an unexpected $ 400 bill.
If you’ve tried the typical belt tightening tips, like skipping Starbucks or going out to eat less, then read on to find out how to balance your debt with your savings and start living a more comfortable life.
Get out of under-indebtedness
Many people are forced to begin their financial journey already saddled with large student loan debt: around 54% of students need to borrow to cover their tuition costs. But with careful financial planning, you can pay off your debts and increase your savings.
There are several financial approaches that people use, including debt consolidation, self-employment to earn extra income, and even investing. Choosing the right approach depends on your income, your goals, and how much you want to save or pay back.
When to prioritize savings
One of the main reasons people should prioritize increasing their savings is when they don’t have adequate emergency funds to keep them floating in the event of a disaster. Some emergencies that could lead to even more debt include car repairs, emergency medical treatment, or unexpected job loss. Experts recommend having funds to pay for at least three to six months expenses saved, just in case.
Another reason to choose savings over debt repayment is to have a low interest rate on your loans. Take a look at how much interest you earn on your loans each year. If you have loans with single-digit interest rates, it may be a good idea to prioritize building your savings. The idea here is that your loan amount won’t change that much with a lower interest rate, which means taking a while to build up your savings won’t have too much of an effect on your money either. credit score.
Another big reason is a comfortable future retirement. If you haven’t started saving for this scenario yet, it’s crucial that you start putting a little something back each month, whether it’s into a 401 (k) account or an Individual Retirement Account (IRA).
The sooner you start saving for retirement, the more long-term returns you’ll see. Investing may not seem in your best interest if you haven’t saved anything or have a lot of debt to pay off. But if your business offers corresponding 401 (k) benefits, you are wasting free money if you don’t take advantage of these programs.
When to prioritize debt repayment
Paying off debt makes sense if your loan interest rates are high. In the United States, aggregate personal debt approaches $ 14 trillion in total. If your interest rates on the money you owe are in the double digits, you may want to prioritize paying off your debt. With a high interest rate, you could end up paying a lot more over a longer period of time if you don’t make regular substantial payments.
Plus, paying off a loan in full will always be in your best interest, even if your interest rate is low but your minimum required payment is still high. By paying off this type of loan, you will free up a significant amount of income for saving and investing, and more than you could if you were trying to pay off a loan and save at the same time.
Prepaying loans can have an immediate positive impact on your credit score. If your score is something holding you back, paying off loans can boost your score so you can take other steps to strengthen your credit, like paying off credit card debt or making sure every bill gets paid on time.
Even simply paying off loans or credit card debt can have a positive effect on your score. Take note, however: there may be penalties on certain types of loans for paying them off earlier, so be sure to read the fine print.
Mastering the art of balancing savings and debt
If you haven’t figured out how to make money while you sleep yet, then the art of balancing your debt and savings is an important lesson to learn. Even the most frugal of expenses will run into financial problems at one point or another.
It is wise to save money in an emergency, so that you don’t get into more debt and have more peace of mind. The key is to find out what your priorities and goals are, so that you can build a financial plan using these tips, and go from there.