Should I Pay Down My Debt or Save More for the Future?
March 10, 2011There are questions in life where sometimes the best answer is “it depends” (how many times did we hear that when we were growing up?). This is one of those questions, but I do have some solid guidelines that can help you make a decision on this question.
First, take a hard look at the interest rates you’re currently paying on your debt as well as what you are getting on your savings accounts. In most cases you will find that your credit card rates will be significantly higher (the average credit card rate is currently around 16.88%) than your saving rate (the average savings rate is currently .38%, yes you’re reading that right POINT three eight!). It should be obvious from strictly a numbers point of view where you will get the most effective use of your dollar – paying down debt. The reason is simple, you will pay more in interest than you will earn in saving.
Pretty easy decision right? Wrong! There are two parts to every financial decision, the purely numbers piece which we just outlined and then the emotional piece, or what makes you sleep at night. So what is the emotional piece to consider?
Do a gut check. If you don’t have anything saved in an emergency account (generally an amount equal to 3-12 months living expenses), and you find that you may actually be incurring more debt and that’s keeping you up at night, there is nothing wrong with putting some of your extra money to saving toward that goal. You probably aren’t going to see huge gains in what you have in savings immediately but what you get in terms of a good night sleep has tremendous value. The other nice thing is that once you have your debt paid off, you can then put all your extra dollars towards beefing up your emergency savings!
One last thing to consider, if your employer offers any sort of matching contribution on your company sponsored retirement plan, please make sure you are contributing enough to get the full company match. After all, if you can get free money to help you in retirement, why not take it?