The vicious debt trap is something that almost all individuals in debt hope to escape. However, each faces the dilemma of deciding whether saving money is a more viable option than paying off debt. The decision to prioritize between these two has remained an immensely debated topic in the financial market’s bookkeeping umbrella. It is essential to be mindful of the various factors that will influence whether either one is a more feasible option – optimizing savings or paying off debt obligations. These factors are in detail in the paragraphs that follow.
When is Saving a Better Option?
It is usually a better idea to emphasize more on savings to prepare for unforeseen circumstances. This emphasis is a general belief that leads to individuals deciding to save when they have outstanding debt in their portfolio. However, these vary from person to person. Situations when keeping, instead of paying off debt, is a better option comprise of the following:
- If the interest rate on loan is low, there is no point in paying off the debt before saving money. The amount that you will use to pay off the debt may instead be saved for use in the future. Lower interest rates may be an excellent indicator to save money now, to be used later, by the principle that dictates that saving is a better option as long as interest earned is higher than the interest paid.
- Another situation when saving for an ’emergency fund’ is a top priority is when you are close to your retirement age. At this particular point in time, saving up for unexpected costs and emergency expenses is appropriate to safeguard for future years. The ongoing source of income is about to end. To ensure a stable life during retirement, saving is a likely option.
- Another situation that calls for saving rather than paying off debt is when your job allows you to access a retirement savings plan. This plan will automatically boost the savings made to retirement savings account if the employer is likely to match the 401(k) contributions. This contribution is essentially free money.
- In case of a small amount of outstanding debt, savings may be prioritized. Out of which, a small amount you can dedicate to paying off debt using minimum payments. This minimum is likely to ensure that the small loan amount is paid off and sufficient savings.
When is Paying Off Debt a Better Option?
Despite the need to save enough money to have backup cash available as and when needed, sometimes it is better to pay off debt rather than accentuating on creating savings. The following situations will require prioritizing paying off debt:
- To improve one’s credit score, paying off debt is a more feasible option. Acquiring a higher credit score is essential to have sufficient credit for use in the future. As a result of a better score, lower interest and insurance rates can be better negotiated for future loans.
- Another reason to pay off debt is the higher than 6% interest rate on loans. With this kind of borrowing cost, it is less risky to settle the debt immediately. No one likes to end up in a situation where the interest paid exceeds the interest earned on savings. Higher interest rates are, thus, an indicator that debt must be paid off, effective immediately.
- To attract lower interest rates in the future, it is essential to lower the balance owed to any loan amount. Making higher payments initially will result in a lower balance and, thus, a lower interest rate can be obtained in the long run, consequently.
Depending on the situation and one’s objectives, either one of the two options may be a priority. A few can successfully maintain a healthy balance between savings and paying off small amounts of their debt. This debt relief allows them a good credit score/worthiness and enough cash savings to be used in times of future uncertainties. Whether you save money or settle debt, it is your personal preference based primarily on circumstances.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.