is it better to save up or to pay off debt?

Question

I want to save but I have a big credit bill and a student loan bill as well as many other exrenses. So I am trying to send higher payments on my loan and credit card but I am not saving at all as a result. So is it better to send an extra $100 to the bills or to put it away in the bank.

Answer 1

Well, the answer to this question depends entirely on corresponding APRs (Annual Percentage Rates). Many times when you carry balances forward on credit cards, it is at a 20%+ APR. You need to first differentiate between high APR and low APR debt. Credit Card is definitely looked upon by credit reviewers as "bad debt". Student Loans, on the other hand, are frequently government subsidized, and even in the case that they are not, they normally don't have over a 5% interest rate.

My advice to my clients is always to pay off high APR debt, and then accumulate liquid savings of about two months of expenses for emergencies. After this point, you will want to pay the minimum on your low interest debt, and invest for your future. Over long periods of time, investing in stock driven mutual funds has shown average returns of over 10% annually. The entire point to this is you could either by gaining 10% per year by investing/saving, or you could be saving 2-3% per year by paying off student loans early. In most situation, the net difference is highly favorable over time.

Answer 2

I would pay an extra $50 a month to the credit bill because the interest rate is most likely higher than the student loan. I would put the other $50 in the bank. Consolidate your student loans (if you haven't already) and if you can have the student loan with an automatic debt to your account you can save $ that way too.

The key is to get that credit bill paid off and not use it anymore. Make your min on your student loan, then when the credit is paid off take the money you were paying it each month cut it in half and send that to the student loan.

Answer 3

What I didn't hear people say about this issue is that Murphy always comes into the picture when you are trying to do something with money. What I mean by that is that something will always seem to occur to make you not want to save money .....you'll need new tires, you have to fix this, you need to pay that etc......Thats Murphy's law. So save a little while you pay off your bills is smart. The student loan bill is a low interest loan right? The credit card needs to be paid as quickly as possible! If you are eligible for a 401k plan where you work then by all means at least save enough in it to get your employers matching amount. Plus you need to save up an emergency fund.....try this.....save $20 each week. After 1 year you will have $1080 dollars in savings plus your debt should be a lot less because you have cut your spending and are paying your debt and loan down as soon as possible! Peace

Answer 4

How stable is your source of income? While it is very important to pay off debt, if you aren't certain you will have a job while doing that, you will need savings as well. Also, keep in mind that student loans can be a tax deduction so you may not want to pay them off right away.

I'd recommend:
Pay off credit card bills as much as you can
Pay off minimum + 10% on student loans (so pay off interest + some principle)
Put 2% of paycheck into savings
Budget rest of the money and live carefully

Also, do NOT use the credit cards for anything you can't pay off but DO continue to use them if you can pay it off (for example, if you buy groceries or gas, use it and then pay it off so you can keep the credit built up and you know you'll have money in the budget to pay that) or if you feel you cannot do that safely, freeze the cards (put them in a plastic bag, put that in a container of water and put it in the freezer) and you won't be tempted to use them while paying them off.

Once again, it all comes down to a budget. Your budget should be able to cover bills as well as a small amount in savings.

hope that helps, good luck to you

Answer 5

Pay off your debt, definitely! Your credit card debt is a HUGE problem on your credit report/score. make that your number one priority until the debt is gone.
Having assets/savings doesn't help your net worth or your credit score if you have liabilties/debts.


Call the American Consumer Counseling Center - unlike a lot of those "debt solution" places, this is a non-profit and won't take your money. They can give you some great counseling and advise you on the best options for your particular situation.
American Consumer Counseling Center
http://www.consumercredit.com/ or 1-800-769-3571

Also, get down to your local library tonight and start checking out personal finance books - they can be wonderfully empowering and inspiring, and most are written in simple, easy-to-understand terms.
-The Complete Idiot's Guide to Personal Finance in your 20s and 30s
-The Complete Idiot's Guide to Managing Your Money
-“Smart Women Finish Rich” or “The Automatic Millionaire”, by David Bach
-any Suzy Orman books

Answer 6

1. You should keep an "emergency reserve." I don't know your situation, but save up $500 and keep it around, earning interest, in case of emergency.
2. Then pay off high interest loans as fast as you can. If the interest rate on the loans is high, or higher than the rate you get on savings, then pay off the loans.

Answer 7

Depending upon your age, you want to get your bills out of the way as quickly as possible but at the same time, you don't want to end up having to borrow from someone next week to cover the following week's expenses. I learned early on to pay myself first. If you bring home $500.00 a week, put up $100.00 each week for yourself no matter what the circumstances and put it somewhere where you are not getting pieces of it each month. That's called "paying yourself first". The first law of nature is the law of survival.......this is how it begins. Trust me, at my age, I have learned a thing or two having made many mistakes where money is concerned. As long as your bills are getting paid in a timely manner, the amount does not have to be exactly what they are asking for. Skim off ten percent if you need to to cover your other expenses each month. Make it up at the end of the year.

Answer 8

Well, both are important. But ultimately you will be able to save more effectively when you have no debt. So I would say tackle the debt first. Besides, if the debt service you have costs you in finance charges or interest, you would just be flushing miney down the toilet if you don't get rid of those liabilities before you start saving.

Answer 9

Pay off any secured debts you have first (student loans, etc). and then worry about unsecured debts (credit card). Once you get to the credit cards, save half and pay half to the lender.

Answer 10

Do both at the same time. I'm in pretty much the same situation as you are. It's really important to try to get rid of your debt while you're young, but you also need to save in case something unexpected comes up. Make payments that you can afford, and look at your savings account also as a "payment" that you have to make monthly. That way, you're making yourself save up, but staying within your budget!