Save or Pay off Debt Dilemma
This is one of the most questionable topics. Everyone has their own school of thought but I’m here to give you the straight up, common sense answer.
No matter what your goals and priorities, you must consistently save. If your total focus is on paying off debt, you are more likely to create a spiral of continuous debt.
Let me explain why.
Part of what is driving your current debt overload is the constant need to use credit cards or lines of credit to pay for items you and your family need, but can’t afford. There is also the constant purchase of things you want, but can’t afford – but that is a topic for another day. When unexpected circumstances arise we quickly slap them on the credit card. The kids just outgrew their winter jacket; the roof springs a leak; the car is making an awful noise; Aunt Betty has decided to visit and now you have to set up the guest bedroom that you have been putting off for years– all things you didn’t anticipate happening. Life as we know it is filled with unexpected surprises. This is why it’s so important to save; so that you can tackle life’s interruptions and not create financial havoc in your life.
Say for instance, you have $30K in debt and your sole focus is on paying off this debt. Over the next year you successfully pay off $5K, but have zero in savings. All of a sudden the furnace breaks down. You can’t go through the winter taking cold showers and lighting mini bon fires in the living room. So what are you going to do? You are going to whip out that credit card, incur more debt and pay for a new furnace. It’s a no brainer. Instead of celebrating your $5K debt pay down, you start a debt pity party and brace the beginning of a downward spiral.
What if your better half passes away unexpectedly? I keep it real with you; people don’t want to talk about the realities of life and prefer to live in delusion instead of preparing for their future. If you are looking for someone to hold your hand and sugar coat situations, then I’m not the one for you. So let’s talk about it. You successfully pay off $5K in debt, but have zero in savings. Hopefully, you have protected your family with some form of life insurance. But even if you have, it takes months until you receive the death benefit payout. In the meantime, funeral costs need to be paid, the kids still need to be fed, the mortgage is due, and all other bills need attention. The family is down to one salary with no savings, how will you manage it all? The only easy solution is to go into more debt; and the spiral begins.
You must have savings to handle the unexpected times in life; so that you can easily cover these expenses and not incur additional debt in the process.
When in life have you ever focused on one thing? Do you just go to work and only focus on your career? Or do you focus on your career, your family, your health and the things you love to do? So why when it comes to your finances do you think it makes sense to focus only on one area? Life is not one dimensional and you can’t treat your finances that way either. You must do both – save for your future and pay down debt at the same time.
You must have all aspects of your finances moving simultaneously – this is my #1 Rule. But, that doesn’t mean everything is moving at the same pace. You first have to get clear on your financial goals and priorities to determine which areas will move faster. If debt repayment happens to be your top goal, then put more money towards the debt but also save a little as well. If saving for the kids’ education or your retirement is your top priority, more money will go towards saving and less to debt repayment. Regardless of your goals you must always be saving – this is Rule #2. It’s all just a balancing act that is driven by your financial goals. All areas must be moving, but some might move faster than others. So make sure to pay off the debt while you save; there is no need to choose between the two.