Paying Debt vs. Saving
Everyone dealing with debts is asking themselves should I use savings to pay off debt? It can be a tricky decision, so how can you decide what to do with your savings and debt?
This article will give you all the facts to pay off your debts and use your savings smartly.
Load and Urgency of Paying Debt
Firstly, you need to know what debt is and the total amount of money you owe, which is referred to as your debt load. You should always try to calculate your debt/income ratio by comparing the amount you owe to the amount you earn to see if your debt load is too much.
Many people strive to pay off debts as quickly as possible or use savings to pay off debt on interest rates. Any debt with an interest rate of less than 7% is regarded as "good," whereas debt with more than 7% is deemed "bad." However, paying interest on top of your balance can make you feel like you're moving one stride forward and two steps back.
This is why many Americans worry they will never be able to pay off their student loan debt and why excessive credit card debt can feel debilitating. Borrowers between 20 and 30 years of age currently owe 65% of the total student loan debt in the US. The sooner you pay off your debt, the less money you'll have to pay in interest.
Another advantage of paying off debt quickly is the ability to focus your funds on other pursuits. According to Northwestern Mutual's 2020 Planning & Progress Study, 58% of debtors believe their debt keeps them from reaching significant financial goals.
Of those polled, 36% said they put off major purchases, 29% said they put off saving for retirement, 18% said they put off buying a home, 8% said they put off having children, and 7% put off marriage.
Additionally, data from the US Census Bureau indicates that 27.5 million Americans had no health insurance during 2018.
Emergency debt is a financial problem that, if not addressed immediately, can result in the loss of assets, energy, and a house, as well as jail. Therefore, it’s critical to act as soon as possible.
The goal of emergency debt advice is to assist you in stabilizing your situation, put action on hold, give your creditor some breathing room, and prepare for a comprehensive legal debt advice consultation with a legal debt adviser.
Paying Debt vs. Saving
Paying off vs. saving is a tricky balancing act for many people. You may wish to save and pay down debt simultaneously in some instances. But, how can you strike that balance? The answer depends on whether you have enough money set up for an emergency fund and how much high-interest debt you have.
Importance of Other Financial Goals
Unfortunately, only 24% of millennials in the US have basic financial knowledge. A financial objective can be characterized as short, medium, or long-term, depending on the time you have to attain it.
Short-term goals are those you want to achieve in a year, medium-term or intermediate goals are those that you want to achieve in five years, and long-term goals are those you want to achieve in more than five years.
Financial goals can also be investments in your future, like buying life insurance or saving for college. Your financial situation evolves over time; therefore, pay off debt or save on time. As a result, it's critical to revisit your financial objectives regularly, preferably once a year.
The review process will also help you track the progress of your financial goals. If you believe your progress is insufficient, you may need to adjust various aspects of your financial strategy, such as your savings, investments, or tax outgo.
Additionally, to achieve your financial objectives, prioritizing is important. It allows you to allocate existing resources and direct future investments toward a higher priority. Understanding the distinction between 'needs' and 'wants' is critical to decide which goals are more important.
How to Pay Off Debt Faster
Debt Snowball Method
The debt snowball approach is a debt-reduction strategy in which you pay off debt from smallest to largest, building momentum as you finish each balance. You roll the minimum payment you were making on the smallest debt onto the next smallest debt payment, and so on.
Debt Avalanche Method
A debt avalanche is a form of debt payback plan that allows you to pay off your debt faster. Essentially, a debtor sets aside enough money to make the minimum payment on each debt and then commits any remaining repayment funds to the debt with the highest interest rate. Once the debt with the highest interest rate is completely paid off, the leftover payback amounts go toward the next-highest interest-bearing loan, according to the debt avalanche method. This cycle will continue until all debts have been paid off.
Debt Consolidation
Taking out a new loan to pay off other liabilities and consumer debts is known as debt consolidation. Multiple debts are consolidated into a single, larger liability, such as a loan, with more favorable repayment terms, such as a reduced interest rate, a lower monthly payment, or both. Student loan debt, credit card debt, and other liabilities can all be addressed with debt consolidation.
Another article of interest on this topic is: What Debts are Forgiven at Death?
In Conclusion
We tried to cover every reason for paying or not paying your debts and methods that can help you pay off your debts easily. After reading this article, you should be able to decide whether you should use savings to pay off debt or not.
