In life, there are just some things that no one expects. You suddenly might feel unwell and a few moments later you’ve got an extraordinarily expensive bill given to you by the hospital due to an emergency. Maybe a sudden event caused a bit of damage to your house, or somehow your car breaks down in the middle of the road and you need to hail a cab and then pay for the tow.
Of course, the answer may very well be always “it depends,” but there’s more to it than that.
Consider every possibility and what benefits and setbacks it gives. Being buried deep in debt can be a very hateful situation to be in, but having no debt while also being broke can lead you to not even wish these circumstances to your worst enemies.
Well, is there another way? Yes – there may very well be. For some people, meeting in the middle can work. Maybe paying some – and not all – of your debt will give you more breathing space in getting out of sudden and unexpected pickles and problems.
Then again, always remember – it depends. So, this short read aims to help you make the right choice between paying and saving.
💲 Pay or Save – Where to Start?
In life, only the bravest – and most naïve for that matter – decide without thinking twice. You’re either extremely sure and confident about your choice, or you surely have no idea of what kinds of consequences you’ll face. There is nothing in between.
Hence, the first step to knowing which path to take, is to assess your situation.
- Is my job stable?
- Is my community facing economic trouble? (Unemployment, recession, depression, etc.)
- Are there expected natural disasters or emergency incoming?
- Are my debtors giving me a firm word about payments and their deadlines?
Both paying your debt and saving up for emergency are extremely important, and you shouldn’t definitely throw both out the window at least. With your current situation assessed, we can now move on to the next step.
💰 Minimum Payments?
The next thing to ask yourself is whether you’ve covered your minimum required payment for your debts or not. Having delinquent accounts, and debts that aren’t paid even partially will surely get you into trouble with your creditors.
The thing is, even if you pay your minimum debt, the interests and effects of only riding the line thereof will affect your credit score. This might affect your ability to borrow more money as you open a new account. Thus, it is extremely recommended that paying a bit more than the minimum is a safer way to go.
So, if you wanna save a bit of money, you have to pay off your debt, even if it’s just a little bit of cash.
Your emergency funds might keep you afloat in a tough storm in the middle of the ocean, but the exorbitant interests of unpaid debt will become the rock tied to your feet that pulls you down. Once you get deep enough, you might not be able to get out.
After taking a look at your debts, one should ask, “Is my job stable enough? Will I still keep this job for a significant amount of time? Does it pay more than what I spend every time?”
There are events in history that tell us that when there is a problem with the economy, spending is better than saving. There was this event in the late 20s called “The Great Depression,” where in places like Germany millions of people lost jobs, the price of bread went up to the billions, and any kind of money just turns into useless sheets of paper. By that point you might as well just keep the cash to have your kids something to play around with.
“Oh, I’m sure something like that won’t happen again,” you might say after giving a sigh of relief. Then again, think of the current situation. We are in a pandemic, and a lot of countries might bleed their coffers dry. Are you sure there won’t be an economic bust or two in the future?
Let’s get back to the situation though. If your job is unstable, and you can’t get that much out of your salary, then you should at least build the bare minimum of what you think an emergency fund should be for when something bad happens.
However, if you think your job is stable and you can live with your salary and have more to spend, then you better start securing those debts because they will get expensive, and will constrict you tighter as you extend the duration of these deadlines that they’ve set.
💳 Credit Cards?
Credit cards can be your best friend, and can be your worst enemy at the same time. Always keep in mind that once you fail to pay the minimum payment for your debt, there will be something in exchange, may it be high interest rates, lower credit scores – or maybe even both. I get it though, some people have no choice as their savings get tighter and tighter as time passes.
Consider other alternatives if you can. However, as once you rack up debt, you will be reeled in and may find it a tad bit tough to get out.
Credit cards for emergency funds are risky. You should be able to take a punch once you fail to abide by the tight rules.
Now let’s talk about interesting stuff, like interests. Interests are the extra payments that come after your original payment, usually happening when you borrow money from someone.
Having debt isn’t a bad thing for the most part. It means you just need a bit more space to step up in life.
The problem is, when there is too much debt. The more debt you have, the more amounts of interest you rack up. This is why you choose what you loan for wisely.
The general rule is if your interests are high, then you should prioritize paying debt off rather than spending more unintentionally on the punishing interest rates it gives off. Lower rate interests? Good! You may prioritize saving for emergencies more if the price they add on top of your debt is not high.
🏡 Mortifying Mortgages
Mortgages. They’re low in interest, but they’re a pain in the neck each and every month you still haven’t paid them off completely. You have to think a lot about your decisions and you need to know what’s up when you solve the problems of mortgages. We’ll make a simple TL;DR for you, however.
Generally, mortgages are paid off quickly by some people because psychologically, it feels like you’ve let go of something heavy you’ve been carrying for a long time. Some debt would be gone, no more monthly payments, no more interests from those mortgages that you’ve been thinking about for quite a while now.
However, it cannot be wise to prioritize them over other debts. They have lower interest rates, essentially. So, you would be far better in focusing on more debts that have higher interests.
🤔 In short: Pay Debt First Or Save For Emergency Fund?
There are countless things to consider in the world of finances. You need to sacrifice, think ahead, make moves and take risks. After all, it would be a boring life if there would be no challenges, right?
To be concise, you only need to think of one word – analyze. Think about what you wish to do, think ahead of the effects of your choices and its impacts on your life.
Financial planning is a very adult thing to do, and each and one of us has to do adulting when the time comes.
You know, whenever I think about these things, a quote from Winston Churchill comes to mind: “If you’re going through hell, just keep on going.”
❓ You Might Ask
- How much money should I save before paying off debt?
The golden rule is to save at least 3 to 6 months’ worth of emergency funds before paying off all debt to the best of your abilities. This is to stave off any problems, at least temporarily, because there will most likely be one even within months’ time.
- Why does credit score drop when you pay off debt?
Closing the account will most likely drop your credit score because of something called “Credit utilization.” This tackles the amount if credit that you are using with respect to your limits. Using some of it will naturally drop your credit score down a bit.
- What does the average person have in savings?
Before the pandemic, US households usually have around $5,300 in their savings and around $40k of balance in their bank accounts. It is obviously recommended to go higher than that since the pandemic is now making a lot of jobs unstable.
- How much should I have saved by the age of 30?
The average 30 year old person should have $14k to $28k in their savings because an average US citizen by the same age group spends around $4.7k per month.
- Should I pay off my credit card in full?
If you have a lot of money to spend that is free and you want to keep a good credit score, then yes. If you have an unstable financial status, then do not pay it all off at once and instead plan ahead.