This is a question that is often asked in the financial world. It is a relevant and a current question especially now that we just started the new year. I had the same question to myself too some years ago. For simplicity’s sake, the debt that I will be talking about in this article is the consumer debt (credit cards, car payments, and personal loans) and not the mortgage debt.
So, which one comes first? Savings or Paying off Debt?
From my experience, I’d say: Pay off Debt…BUT set aside one month worth of emergency fund first.
As your budget pal, I believe that you cannot save if you have debt. With this said, this is my suggestion: save for a month worth of emergency fund, pay off all your debt, and then, save for the long-term.
Total all your expenses for the month: rent, utilities, food, entertainment, transportation, etc. Whatever total you came up with is the amount that you’re supposed to save in your bank for emergency purposes. I know that some financial advisers would want you to save three, eight, or even a year worth of emergency fund – but in this particular case – paying off your debt should be the priority.
At a time where the average interest earned on savings is only giving you 1% or less, and the interest that you are paying on your consumer debt ranges from 8% to 25%, it is rather wise to pay off your debt. It is a no brainer. I’ve compiled some tips for you to pay off your debt.
When all of your debt is gone, then, you can just concentrate on building your savings. This strategy has helped me in the past, and still true as of today. On top of this, it feels a lot better, psychologically and emotionally, when you are debt free.