Pay Debt or Save: That is the Question
Right after graduating from college, I was forced to make the decision to pay debt or save my money. Having that looming cost each month causes stress and tight budgeting, which is especially hard when friends want to go on fun weekend getaways and attend music festivals. On one hand, paying off debt quickly will decrease the amount of interest paid on a loan–but on the other hand, you don’t want to be stuck with no savings in the case of a financial emergency. Both sides have pros and cons, so here are a few things to think about:
Pay it Off
When you’re thinking “should I save or pay off debt,” there are a few key things to consider. For me, I can’t wait for the day when I don’t have to allot my expenses to pay off my debt, so having that peace of mind is really important. Whether you’re hundreds or thousands of dollars in debt, there may always be a looming anxiety to get rid of this cost.
Paying off your debt first also helps to cut the cost of interest in the long run. If you’re just paying your minimum payment for a college loan or credit card, a chunk of that is going toward interest. If possible, you may want to pay more than the minimum balance to avoid paying thousands extra in interest.
If you think you’re going to be trying to make a down payment on car or other large purchase, having less debt can greatly help your credit score. Money Crashers notes that credit card and loan balances factor into a credit score, but the amount of money you have saved doesn’t go toward that. Did you know that the amount of money you owe accounts for 30 percent of a credit score? Yikes.
Save it Up
Have you ever looked at your bank account to find you have only $20 to your name? It’s a scary feeling! You never know what may happen in between pay periods, but being left with so little money may just be the best way to prove you’ve got to save a little. Having a financial cushion may take a few months to build, but once it’s there it can be very reassuring. If your employer offers a 401(k) plan, take advantage!
Here’s a tip to save some dough: Right when you get paid, have your online bank account set up so that money automatically gets put into your savings account–out of sight, out of mind. In just a few months, you’ll have a nice chunk of change saved up without even trying.
Whether you want to save or pay off debt entirely depends on your own financial situation and future plans. The best solution is to find an even balance that allows you to save a bit, and work toward lowering payments and getting rid of credit card and loan debt altogether. That is, of course, unless you plan on winning the lottery some time soon.