It is often hard to choose between paying off a debt and saving for emergencies. This brings us to the age old question – “Should I save up or pay off my debts first?” To answer this question, let’s look at the pros of both sides of the argument.
In Favour Of Paying Off Debt
Paying off debt before you start saving can be a great option to those looking to pay off their debts faster and have less accumulated interest. Further, the interest that you are avoiding on debt is probably much higher than the interest you would earn on savings. This means that you will probably have more money in total if you pay off your debt first and then start to build up savings second. But of course, this is not the case if you don’t stay out of debt once you pay it off. Also, if an emergency occurs while you are focusing on paying off your debt; it may force you into deeper debt by taking out an emergency loan.
In Favour of Saving for Emergencies
The main argument for saving for an emergency is that having savings allows you to break the cycle of debt. For example, if your car breaks down or your roof starts to leak; you won’t be forced into relying on your credit card to pay for it. Instead, you will have your emergency funds to fall back on. At Debt Fix we recommend that you get into the habit of saving at least 10%-20% of your income each time you get paid. This aligns with the ‘pay yourself first’ thinking and allows you to gradually save up for emergencies over time.
At Debt Fix, we believe that a mix between the two strategies is the best in the long run. First, it is important to have a small amount of savings, to begin with, so that you can always have something to fall back on. Then, try to pay off your debts as fast as possible while still maintaining the 10% savings from each pay. You can never know when or if an emergency will occur, so all you can do is plan and be prepared for when they do occur. Ultimately, to gain financial freedom in the long run you need to work on both eliminating debt and saving for emergencies simultaneously. Striking a balance between saving and paying off your debt will put you in a good mindset for the future.
If you are unsure on how to reach the perfect balance for saving while paying off your debts, you may want to think of debt consolidation options to consolidate all your loans together. On the other hand, if you are thinking of taking out an emergency loan it may be a good idea to speak to a debt professional to make sure you will be able to pay it off in the long run. If you need any help managing your debts, please don't hesitate to contact our specialists on 1300 332 834 or leave an inquiry for more information.