Should I Save My Extra Income or Pay off My Debts?

Should I Save or Pay off My Debt?
Should I Save or Pay off My Debt?

Should I Save or Pay off My Debt?

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them” – Ogden Nash

You’ve got a bit extra at the end of the month – Should you pay off some of a loan or save that money? Perhaps you could earn more interest on the savings and use it later to pay off your debt?

There’s certainly the potential for a great feeling of accomplishment when you build up a savings pot, particularly if it’s an amount set aside for a particular goal like a new car or a holiday. When you’re saving, you feel like you’re increasing your self-worth. Paying off debt instead often feels simply like chipping away at something that you try so hard to forget about.

Running the Numbers of Debt Repayment vs. Savings

However, we should look at this from a purely financial point of view. If you don’t pay your credit card bills or other loans, the interest snowballs – and snowballs quickly. The interest from savings is just a small percentage of this amount. Therefore paying your debt first should be your number one priority before you commence on your savings plan.

Let’s take an example. Loans or credit cards will often charge you interest rates of 19% or more, but a high interest savings accounts might only offer you 3% – if you’re lucky. So over the course of a year, a $2,000 credit card debt will accumulate $380 of interest whereas your savings account would have only thrown you $60 in interest on the same amount! Therefore paying off the loans or debts in the prearranged period is analogous to saving money, and storing that money in your savings account is simply a wasted opportunity.

Pay Off Your Debt before You Begin Saving in Earnest

Now, you should always have a certain amount set aside for curve balls; a buffer that you keep aside for unexpected events. But apart from that – pay off that debt! It’s easy to come up with clear and manageable goals for your debt repayment, and once you do – stick to them. Go back to them on a monthly basis and see how you are performing.

Undoubtedly, the accomplishment of being debt-free in the future will greatly outweigh any savings goal that you can achieve while still in debt.