Saving money isn’t just about putting aside funds. People save by spending less, investing, becoming homeowners… a savings account isn’t the beginning and end of a saver’s journey. That’s why day 4 of America Saves Week is about a very important way to save: reducing debt.
When you pay off debts, you’re saving. There are so many ways that debt is draining your finances, it’s hard to capture with simple math. Think about what debt really costs you:
All your debt costs you extra money every month. Paying off debt doesn’t just settle that amount paid, but prevents years of future interest charges on the debt.
…and annual fees, over-limit fees, cash advance fees, balance transfer fees, and so on… credit is an expensive product, and credit card companies have myriad ways of extracting funds, even from borrowers who pay on time. The best way to avoid all of those fees is to pay off debt and keep it paid off.
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Carrying debt lowers your score, and that score affects all corners of your financial life. So many important financial moves you make will be affected by this score, so keeping it high means paying less for your mortgage, auto loan, or any other debt you incur. Pay off the debts you have so you have access to credit at the best rates.
So many people carry too much debt, making the question of building savings or paying off debt a real conundrum.
This much is true: if you have credit card debts, the interest is certainly costing you more than you’d earn in interest from a savings account.
That implies that paying off debts should be your first priority, before saving, right? Not quite. We stressed earlier this week how important it is to save for the unexpected.
Emergency savings comes first. Don’t leave yourself vulnerable by paying off debt and not setting aside anything in an emergency fund.
When your emergency fund is established, we still think you should strike a balance between saving and paying off debts. The saving habit is too important to develop, so it shouldn’t be put off until your debts are gone.
Generally, we want you to be saving 20% of your income. But if you’re struggling with debt, at least half of that 20% should be going to eliminate debts. Then, as the debts disappear, the full 20% can be saved.
Some people can’t afford to save and repay debts without spending more than 20% of their income. If that sounds like you, don’t wait—call and talk to a free nonprofit counselor who will look over your finances with you and help you create a budget that is designed to make you debt free.
Some people benefit from a focused debt management plan that eliminates debt on a set schedule, and coordinates with your creditors to stop accumulating new debts, and even reduce interest rates or waive fees. If you really need it, this plan can get you on the path to financial freedom.
Every dollar you’re paying in interest on your debts could be better spent on your future. Saving for emergencies, saving toward education expenses, becoming a homeowner… debt makes all of those goals harder to reach. If you’re ready to pledge to save this America Saves Week, then you need to get ready to say goodbye to debt.
