Is it better to pay off debt or to save? This age-old financial dilemma is a question that many individuals face. Both options have their merits, and the decision can be a challenging one to make.
To help you navigate this decision, we’ve outlined 10 key questions to guide your thought process and make an informed choice.
10 Questions To Consider When Deciding To Pay Down Or Save
1. What is the interest rate on your debt?
The interest rate on your debt is a critical factor in your decision-making process. High-interest debt, such as credit card debt, often comes with interest rates that can exceed 20%. This means that for every dollar you owe, you’re paying a substantial amount in interest charges.
In such cases, it’s usually financially prudent to prioritize paying off high-interest debt. The money you save on interest payments can be redirected toward savings and investments.
2. Do you have an emergency fund?
An emergency fund is a financial safety net that can help you with unplanned expenses, such as medical bills or car repairs. An emergency fund can also help bridge the gap during the loss of a job. If you don’t have an emergency fund, it’s wise to establish one before aggressively paying down debt.
Without an emergency fund, you might be forced to rely on credit cards or loans when unexpected costs arise, which can exacerbate your debt problem.
3. What are your financial goals?
Your financial goals play a significant role in this decision. If you have specific short-term goals, such as buying a home, going on a dream vacation, or starting a business, you’ll need to save money to achieve them. Long-term goals, such as retirement or your children’s education, may also require saving.
Understanding your goals and their respective time horizons will help you allocate your resources effectively.
4. Are there tax benefits to saving?
Saving for the future can come with tax advantages. For example, contributions to retirement accounts, such as a 401(k) or an Individual Retirement Account (IRA), may be tax-deductible, or they can grow tax-free until you withdraw the money in retirement.
These tax benefits can help reduce your overall tax liability, making saving an attractive option, especially if you’re in a higher tax bracket.
5. What is your risk tolerance?
Your risk tolerance reflects your willingness to take on financial risk. Paying down debt is a more conservative and low-risk approach since it guarantees a return on your investment equal to the interest rate on your debt. On the other hand, saving and investing carry varying degrees of risk. The stock market, for instance, can be volatile. If you’re risk-averse, paying down high-interest debt might align better with your financial personality.
If you’re comfortable with risk and seek higher potential returns, saving and investing could be more appealing.
6. Are you taking advantage of employer benefits?
Many employers offer retirement account contributions or matches as part of their benefits package. This is essentially free money that can significantly boost your savings. If your employer offers such benefits, make sure you are taking full advantage of them.
Contributing enough to get the maximum match is often a smart financial move, as it can provide an immediate return on your investment.
7. How disciplined are you with your finances?
Consider your financial discipline and spending habits. If you find yourself consistently overspending or struggling with impulse purchases, it might be more prudent to focus on paying down debt. Reducing your debt can provide a more stable financial foundation and discipline, which is essential for effective saving and investing.
Once you’ve established better control over your finances, you can allocate more toward savings.
8. How much time do you have until retirement?
The time horizon until your retirement plays a crucial role in your decision. If you are nearing retirement age, you might want to focus on building up your retirement savings. However, if you have several decades until retirement, you can afford to take a more balanced approach.
In the latter case, it’s essential to start saving and investing early to take advantage of compounding growth.
9. Can you do both?
Striking a balance between debt repayment and savings is often possible and advisable. You don’t have to choose one over the other exclusively. By creating a financial plan that allocates a portion of your income to both debt repayment and savings, you can make steady progress on both fronts.
This balanced approach ensures you’re chipping away at your debt while building your financial future.
10. What are your financial values?
Your financial values and priorities are unique to you. Consider what matters most in your life. Is it financial freedom, the peace of mind that comes with being debt-free, or the pursuit of specific long-term goals? Alternatively, do you prioritize having a substantial savings cushion for opportunities and security?
Your values will influence your decision and guide you toward a choice that aligns with what matters most to you.
Make The Right Move At Arizona Central Credit Union
Deciding between paying down debt and saving is not a one-size-fits-all choice. It depends on your unique financial situation, goals, and values. By answering these 10 key questions, you can create a personalized financial plan that strikes the right balance between reducing debt and saving for the future.
At Arizona Central Credit Union, we’re here to help you find the best answers and strategies for securing your finances now and in years to come. Try our Save or Pay Off Debt calculator to help you take a good look at your debt.
We offer a variety of checking and savings account options. If you have any questions about opening an account, contact us online or call (866) 264-6421.
