Should I save first or pay off debt first?

Question

Recent grad, have student loans and car loan. There is room for me to either save rapidly or pay off my debt rapidly.

What should I do, save first or pay debt first, or mix?

Answer 1

This is a complex question. It depends on the interest rate. The car loan is probably high interest, so it would be best to try paying that off first. Many student loans are low interest rates, and there is little hurry to pay them off. Put some money in an emergency fund at Vanguard at 5.22%. Experts suggest having 3-6 months worth of salary in an emergency fund. Also consider investing in a 401K at work, particularly if they match it. Also consider a Roth IRA. These investment options may offer a higher return on your money than the interest rate on the student loan.

Read the article below.

Answer 2

Only you can decide.

Can you live with the liability provided by debt and get a huge jump-start on the long-term savings plan of retirement and other goals?

Or are you more fearful of the short-lived interest you will pay on debt that you pay off in the beginning of your career?

Me? Depending on a couple factors I would be putting about 50-75% of available funds into long-term savings goals such as a house and retirement. The reason why is that the interest you earn after 20 years or so of compounding is huge compared to the minor fees you will pay to carry the debt a little while.

Everyone here is saying the exact opposite but I would encourage you to consider this option. The interest rates you are paying are also a small factor. But I would not equate a 10% APR on a CC with a 10% stock market return any day. The key here is long-term savings with the power of compounding.

I would then pay only about 25-50% back towards debt.

Is debt bad for your financial life, yes. But would I sacrifice the humongous long-term gains I get from starting a savings plan early to avoid paying some small interest fees now? Hell no.

There is a free downloadable 40-year investment calculator at the URL below. Plug in some calcs and see if you like what it tells you.

Good luck!

Answer 3

pay of the debt first, then start saving.

with a couple of exceptions. if your employer offers a 401K program with matching, you should contribute enough to obtain their entire match, before you pay off debt.

if you are eligible for a traditional IRA you can contribute $2000 per year tax free. so figure out how much that saves you in taxes and whether that is more than the interest you will pay on the loans.

if you don't want to do the math, just pay off the loans first then start the IRA . but you should still contribute to get the matching on 401K

Answer 4

A good method is to first save $1000. Do it as quickly as possible. Then begin paying off debt. Start with the smallest balance. Throw everything into it, while making minimum payments on the higher balance bills. When the first is paid off, you have more money to roll into the other bills. You can actually do it pretty quickly this way. When the bills are paid, you can start really saving money. It works!

Answer 5

For the most part pay off debt. However if you have a 401k and a company match consider putting money in up to the match amount. Usually a company will match you dollar for dollar up to a certain percent of your pay (something like 3% or 4% of your pay). This means that you instantly get a 100% return on your money.

Then pay off debt.

Answer 6

You should do all the tax-advantaged saving that you can first. Max your IRA contributions and put enough in your 401(k) to get the full company match. Then, save enough for a 2 -3 month emergency fund. Then, use all your extra money to pay down your debt. Tax-advantaged and emergency savings should come before debt payments (and really before almost anything else)--but debt-payments should come before any other investing.

Answer 7

Pay off your debt. You're probably paying more in interest on that than you would earn in a savings account. Once your debt is down, save, save, save until you can invest, invest, invest. Good luck.

Answer 8

Pay off your debt, of course. I'd definitely concentrate all of your available funds on doing that first, as interest rates for credit cards, etc. can be high, and who wants to throw money away to interest? Once your debt's paid off, you can focus on saving your pennies.

Answer 9

Pay off your debts first. Once your debts are paid off you'll have more cash on hand to save with.

Answer 10

Save three months of expenses for an emergency fund, then pay off your debts. Then you can start saving for real. Just my opinion, but it worked for me.