A constant thought that crosses our minds, and I’m sure it does for many of you as well . . . is whether or not you should be paying off your debts – or focusing on saving instead?
While this opposing question may be different for everyone, depending on your current situation as well as your future financial goals – there are certainly advantages of both actions. Either road can lead you to improve your financial circumstances, the trick is just to decipher which is best at that time. Just to stir the pot a little further – what if you don’t have to choose one or the other ? Maybe what is best for you is a combined-effort between the two methods . . .
Here are some points to keep in mind as you decide which of the two outcomes is the one you will either make your soul priority – or if you determine that balancing both is actually your best bet.
Reasons to Pay Debt
1. High Interest Credit Cards
If you have one or more credit cards that contribute to a lot of your debt and you find you have not been able to pay them off for some time, then choosing to focus on paying down this type of debt may be the better option. With large credit card balances and loads of interest fees, chances are you’ve likely been paying off mostly interest fees each month, thus not really making much progress paying down your debt. Looking at the average interest rate of 20% versus the amount of interest you can earn by opening up a savings account (closer to 1%), based on this basic math – paying down debt may help your cause way more than saving your money at this point in time.
2. Pay Less Interest, Pay off Debt Faster
If you also decide to focus on paying off more of your debt, you will end up actually saving interest charges. This doesn’t mean that your interest rate will change, it does however mean that you will pay less in interest fees, if you pay off your debts sooner. If for example, by only making minimum or smaller payments each month, it takes you 7 years to pay off your credit card balance – over the course of those 7 years you will be paying a lot more in total interest. Instead, by making larger payments each month, you should be able to reduce the amount of years it takes you to pay off the balance in full and also save on interest charges. With a lower balance each month, after paying down more and more, the amount of interest will also go down each time.
3. Improving your Credit Score
One final reason why paying down debt may be the more favourable of the two options at this time, is if your debt load has lead to very poor credit. By now you probable are aware that having a low credit score can cause some unwanted financial issues. With a poor score it is harder to obtain loans and even when you are able to secure financing, the terms are less negotiable and this can include higher interest rates. If you have maxed out credit cards, other loans, such as a mortgage, a car loan, etc. – without being able to keep on top of these payments and continuing to have a huge debt load – your credit score will certainly be affected. In this instance, by opting to pay down your debt at a more consistent and efficient rate, you’d be surprised at how much more debt you can get rid of and as a result you’ll notice that your credit score will improve – opening up more doors for future credit opportunities when you most need it.
Reasons for Saving
1. Saving for Emergencies
One highly important reason for beginning to save as soon as possible, is in case of an emergency. Having savings for anything unexpected, such as uncovered medical bills, sudden vehicle repairs, and so on – is certainly an action that can save you money and great piece of mind for the future. The fact of the matter is you never know what can happen, and having some money saved for a ‘rainy day’ can help you out if in a pinch. This can also be a good way of avoiding adding to your debt, if you currently have some debt, yet do not want it to get out of hand. If you decided to pay off your debts and didn’t have any money tucked away, you could just go right back into debt again – a pattern that can continue to viciously repeat itself.
2. Saving for Future Goals, Education, Retirement, etc.
While it may make sense to pay off your debts before you start to save some money, certain future financial goals require some advanced planning. If it is your goal to save for post-secondary education or if you are at the point in your life where you want to start planning for your retirement, initiating a savings plan as soon as possible can be a good idea. If your debts are not too extreme, then making saving a higher priority may be the best option for ultimately being able to save the money you will need for these future goals – sooner rather than later.
Of course, there are other methods of applying for tuition for various school programs, however if you are in the position to start saving money for your education, then in the end you will owe less money once you have graduated – and if you are lucky you may be able to begin your post-education years with little to no debt at all.
3. Tax Free Savings Account (TFSA)
If you are relatively free of debt and can afford to save your money, then having money transferred into a TFSA can be a beneficial way to save some money and also pay down debt at the same time. Not only will the account keep your savings tax-sheltered, they can also help you save small amounts over time. You can choose to save as low as $25 a month, if that is all you can currently manage – or you can up this amount to as much as is reasonable for you and also allows you to have funds for other purposes. This method, can be a good fit for those that want to try and find a balance between saving and paying off debts. It can also be more effective if a budget is designed to factor in this TFSA account amount each month.
While it is likely that through this last method it may take longer for both your savings to grow and your debt to be paid off, it can be a good method of making both options a priority and covering both of your bases. If your debt is sky-high, then perhaps taking some time to pay down some debt first is better. Once that goal is achieved, then you can work diligently at putting some extra money away into your savings.
Final Thought: Debt vs Saving
Ultimately, you will have to evaluate your own situation to determine which course of action is the best path to take. You can however, tuck these arguments away in your back pocket as your financial situation may change from time to time, and either of these points of view may apply to you at various times of your life. Either way, being committed to executed one or both of these plans can provide you with the piece of mind that you are taking control of your finances and making educated decisions based on what is right for you.
