One of the most difficult financial choices you can expect to face is not whether to buy a brand-new car or a used model. It is not a choice between renting an apartment or buying a home. No, one of the most difficult financial decisions facing millions revolves around the balancing act of saving and paying down debt. Which avenue should you pursue first? Is it more important to funnel your extra funds towards emergency savings to cover unexpected expenses, or begin paying down existing debts so you are not getting gouged by high-interest payments? The following tips will help you decide whether to pay off debt, build up your emergency funds, or even tackle both at the same time.
When to Pay Off Debts First
The type of debt you are carrying should be a determining factor in where you funnel your extra money first. Certain types of debt are healthy and typical to carry, such as an auto loan or a home mortgage. These items carry value over time that can be partially recouped, in the form of selling a car or even recouped with profits in the case of a home sale. However, if you are carrying high-interest consumer debt it may be a good idea to pay down that debt first before you focus on saving. CNN Money notes that focusing on high-interest debts can help you save money in the long term. The high interest can lead to issues paying off that debt in the long run and impact how you manage other financial issues.
When to Save Money First
How much savings do you have in your bank accounts right now? If you do not have any savings, you could find yourself in an even worse situation down the line when unexpected costs come up. By directing all your money toward existing debts and ignoring your savings, you could be left borrowing money again when those unexpected costs arise. This is how many people end up in a revolving door of debt that sees them continuously borrowing money to cover expenses and never getting ahead on savings.
It is not unheard of for Americans to have no savings either. If you focus only on your debts and ignore saving for emergencies, you could join the 66 million Americans PBS notes have no savings at all. Some 28% of Americans only have six months of savings, so it is important to find the right balance between saving and paying down debts.
Consider Tackling Both at the Same Time
The best solution for most people is to find the right balance between tackling debts and setting aside money in savings for the future. The figure which constitutes a safe balance is a personal number determined by each individual. You will need to determine how much money you have in savings, what your existing expenses are, and how much income you have currently. Then you can determine how much you can afford to put into savings each month while also paying down debts and meeting your existing obligations.
A financial advisor at Manhattan Ridge can help you analyze your income, expenses, and financial stability to find the right balance between paying off debts and socking away money in an emergency fund.