How to Answer This Question: Should I Save or Pay Off Debt?
October 21, 2021
If you believe paying off debt is your only financial priority, consider this: saving is also an important way to keep your finances stable. Here are some ways to make progress on your debt, and put some savings aside at the same time.
Begin with a plan to pay off your debt first, such as the avalanche method (paying off your balances with the highest-interest rate first); or the snowball method (paying off your debts with the smallest balances first). You can also review your budget to see where you can reduce expenses, consolidate your debt, or refinance your auto or home loan for a lower interest rate and shorter term.
Increasing your income through freelance jobs or other part-time work in addition to your full-time job can also help. Plan to apply most of the money you save or earn toward your debt.
While paying off your debt is important, so is creating a financial cushion and planning for the future. An emergency fund can you help you pay for unexpected costs, such as car repairs or medical expenses. Having cash on hand for unplanned costs can also keep you from having to use a credit card, helping you to avoid adding more debt.
Experts recommend saving three to six months’ worth of expenses in an emergency fund. This may seem overwhelming, but you can start with a smaller goal to make it easier. You can also set up automatic transfers to your savings account every time you get paid.
Even if you are not close to retirement age, starting to save now is a smart plan. If your employer offers a matched contribution for its tax-advantaged account, such as a 401(k), be sure to contribute enough to meet the match requirement; that’s free money.
If your employer does not offer this type of account or you’re self-employed, opening a Traditional or Roth IRA (individual retirement account) will allow you to start saving right away.
MSUFCU’s Mobile app is an easy and quick way to manage your accounts, set up automatic transfers, and more. Our Savings BuilderSM account helps members save faster by paying more dividends on their initial deposits. We also offer Traditional and Roth IRAs. Visit msufcu.org to learn more.
Tags: Financial Faceoffs, Money Management, Tips and Tricks