Should You Save Money or Pay Down Debt?

A lot of people are drowning in debt. They have so much debt that saving money doesn’t even seem possible. I have been there, and I am here to tell you that it is possible to turn it around.

Obviously, paying off your debt is important. If you don’t pay off your debt in a timely manner, you could lose your house, or your car or whatever it is you owe money on. There’s also your credit report. If you default on your loans, it will kill your credit, which could affect your ability to buy a house, rent an apartment, secure car insurance or even get a job. You have to pay your debt, but does that mean you can’t also save?

I am a product of the Dave Ramsey approach for building wealth while beating your debt. His method includes seven baby steps. The first one is saving $1,000 for an emergency fund while continuing to make the minimum payment on your debt - even if you can only save $10 a pay check. Here’s why.

If you pay down your debt but have nothing saved for emergencies, what will you do when an unexpected expense like a car repair or health scare? Mostly likely, you’ll charge it on the credit card you’ve been working so hard to pay off. An emergency fund helps you avoid that.

There are other schools of thought that believe you should focus on paying off your debt first, because in most cases your debt costs you more money than your savings makes you. Many credit cards have interest rates higher than 20 percent APR. In today’s economy, you’re lucky to earn as much as one percent APY on a typical savings or money market account. Of course, if you only make the minimum payment and your debt is substantial, it will take decades to pay off your debt. If you decide to focus on debt first, be sure to pay more than the minimum payment on your loans and credit cards.

Deciding whether to save money or pay down debt is a very personal decision. Unfortunately, we can’t make that decision for you. We can, however, give you tools and advice that help you make the decision that is best for you. Start with our online education center for personal finance called BalanceTrack. You will find all kinds of information on just about any topic related money. Next, check out our BALANCE program, designed specifically to help you break the debt cycle.

NCU is here to help, but we know there are lots of other resources out that. How have paid down your debt while saving money? Please leave a comment so others can benefit from your information.