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Finance & Money
July 02, 2020 By Budget Insurance
Wondering whether you should pay off your debt or concentrate on saving? It all depends on your financial situation. Wiping out debt before saving isn’t the right choice for everyone. And the same goes for saving rather than paying off debt. So what should you do?
Here’s how to manage your debt and savings in a way that suits your pocket.
Saving without paying off debt
If you save first and don’t pay towards your debt, you could pay more money over time in interest charges. For instance, as credit card interest rates are often higher than savings account interest rates, you could end up spending more on debt interest than you could have earned on a savings investment.
If you prioritise saving over paying off debt, you may enter retirement with debt. This means you may have to live on a strict budget during a time when you should be living comfortably.
When should you prioritise saving?
Prioritising saving is beneficial as it ensures you will have enough money to cover unexpected costs, keeping you out of the debt cycle. You should consider prioritising saving:
Paying off debt and skipping savings
Unexpected expenses are often looming. If you have no savings to fall back on during an emergency, you’ll have to use credit instead, racking up more debt. Using credit to fund emergencies only makes it harder to pay off debt.
When should you prioritise paying off debt?
The more you struggle to cover your monthly expenses, the more debt you could rack up, as you may use credit to fill the financial gap.
Which is the best approach?
There is no one-size-fits-all approach when it comes to finances, but the best solution is to find a balance between saving and paying off debt that works for you.
For example, if you have an extra R2,000 per month, you could put R1,000 towards debt and the other R1,000 in your savings account. You can decide how to apportion these amounts based on how much debt you have.
It’s important to remember that saving and paying off debt work hand in hand. For instance, having savings to cover unexpected costs could help keep you out of the debt cycle.
What should you do if you’re swimming in debt?
Speak to a financial or debt adviser who will be able to help you develop a plan that suits your budget. Get started with these tips for shedding bad debt and saving:
The information in this article is for information purposes only and does not constitute professional advice.