As you reach a certain point in your life that you want to have a much more stable financial situation, paying off your debt and building your savings are important financial goals.
Living your life debt-free is what you desire but if you focus more on paying your debts, it could mean that saving money for the future is jeopardized.
But how will you know which is the best way to spend your money?
Using a combination of saving money and paying your debt at the same time can be an effective approach. But before you do that, let us help you dig deeper to understand. This way, you can weigh the pros and cons when deciding whether to pay only your debt first or save your money.
You can better analyze your current financial situation and realize what is indeed the best approach in moving forward towards your financial goals.
Major points in settling your debts first
When you are paying debts incurred by using your credit card, some companies are charging interests as much as 20% on outstanding balances. Paying these high interests will make it much more challenging for you to manage your daily expenses.
When you pay your debts in small amounts, it will feel like paying your debt doesn’t end for a very long time. And there is a chance that you will often be running low on cash.
For you to know how long it will take for you to finish paying off your debts, you can use a financial calculator or consult your bank on how they do a computation in terms of paying your debts.
Paying your debt first can improve your credit score which can help you have a good chance of being granted a car loan or mortgage from a licensed cash lender. When you have huge savings in your bank account it does not have a bearing on your credit score. Your savings can only be acknowledged and considered when borrowing money from the bank.
If you choose to pay off your debt first, the most logical step is to create a budget that is based on your income and expenses you will not be spending more than you earn and keep your debts under control. Being strict with your budget will not only teach you how to manage your money but also avoid debts.
Importance of building your savings
Before you decide to save your money first, assess your current financial situation and the amount of debt that you currently have.
Saving money is important and can create financial security in times of unexpected events. While it makes sense to pay off your debts first and the interests that go along with it, building your savings could be a better option. In your monthly income, you can set aside some money to build up your savings fund and you could start at least S1000.
Maintaining this amount on your account means you have good spending habits and forces you to live within your means.
Once you have paid off your debt such as credit card debts, you can now put more money into your savings account that is worth three to 6 months of your income. This will be very helpful in times of illness, sudden job loss or even divorce. When you have an emergency fund, it can help you survive through the toughest times without relying on borrowing money from banks – which makes you fall back into the sea of debt.
The Best Approach
The best way to decide on which to prioritize between paying off your cash loans and saving money is to use a balanced approach. It is best to use a balanced approach between the amount you spend in paying your debt and the amount you put into your savings. It is not a good decision to sacrifice the other as a substitute for the other. It is not wise to focus on just paying off your debt but you are not building your savings.
A balanced approach can be done when you create a budget and identify your financial priorities. It is important to track your expenses every month to find out how much is going into paying your debt and how much is set aside for your savings.
For instance, you are earning $3,000 a month and every month you have an extra $1,000. You can allocate $500 to paying off your debt and $500 goes into your savings account.
It may take a while for you to completely pay off your debts but your savings are already starting to grow. No matter what approach you take, it is important to assess your personal financial goals and determine which you should prioritize. Whatever you decide, it is all about balancing your finances.