Is it better to pay off debt or save money?
Canada Life - Jul 07, 2020
If you have some extra room in your budget, consider this as you make your decision
Here’s what to do in four easy steps.
It’s the end of the month and you have a bit of extra money, but you’re not sure what to do with it. Should you put some of it toward paying off a debt like your student loan? Or should you be saving it for a rainy day? It’s a question that most people ask themselves many times throughout their lives. Thankfully, I can help you decide. Here are four easy steps along the path to paying off debt and building a savings portfolio.
Step 1 – Build your safety net
“Pay yourself first,” was the advice from David Chilton’s bestselling book The Wealthy Barber. Building a financial cushion is important. Some financial experts recommend saving every month until you’ve got the equivalent of two months of your salary for use in an emergency such as a medical issue or job loss, but that’s only a guideline. Depending on your lifestyle, you may need to save more.
Once you’re in the habit of setting aside emergency fund money, what should you do with any excess cash that’s left? It’s important to have a plan for how to best manage extra money, whether it’s an annual bonus, an inheritance or a well-budgeted month that leaves you with some additional dollars.
These next steps will help you to make the right choice for your unique financial situation.
Step 2 – Set goals
The most important strategy here is to set financial goals—both for savings and debt-reduction—so you understand what you’re saving for and how you’ll get there. Determining these goals is key because it helps you to understand how a few dollars saved and invested can have a positive impact on your financial situation. It’s important to consider the interest rate earned on your investments and the interest rate charged on your debt. You may want to contribute a larger portion of your savings to where the highest interest rate is.
If you’re making the minimum payment on a credit card, see how many months it’ll take you to pay it off and how much interest you’ll pay during that time. Once you see this number, you might be more motivated to pay this off faster so you can keep the money that would have gone toward interest fees. This also applies to other types of bad debt such as payday loans, car loans and other high-interest loans. On the flip side, this approach also works for good debt such as student loans, a mortgage or a business loan.
The thought of calculating interest rates, principal payments and interest payments doesn’t have to be challenging. We can work together, and I can help you crunch numbers to ensure you make the right choice for your situation.
Savings and investment goals
Once you have a goal, you quickly start to realize that every dollar saved gets you one step closer to that goal. Have you been hoping to start a side business? Are you saving for a down payment on your dream home? Would you like to buy stock in a company whose mission you believe in? Or would you like to invest in an RRSP? Determining how much money you’ll need to put aside to meet these savings goals and creating a timeline to get there helps you to see the bigger picture. Again, if you’re not sure how or where to start, you don’t have to figure it out alone – I’m there to help.
Step 3 – Stay committed
Once you’ve chosen a goal, decide what percentage of your available funds you’ll use to pay down debt and what you’ll use for investments and savings. As a visual reminder, you can put this on a sticky note on your bathroom mirror, a poster on your bedroom wall or use a picture of it as the wallpaper on your phone. Take small steps each day to make a big impact on your financial plan. Every bit of debt you eliminate puts you one step closer to your goals.
Step 4 – Remember that every dollar counts
You may have heard your parents talk about “keeping up with the Joneses,” or the idea that some people make purchases they can’t afford in an effort to “keep up” with others. Remember, the only person you need to keep up with is you.
If you have a tough month where you couldn’t save as much as you wanted, the good news is there’s another month coming up for you to focus on your goals. The sooner you can get back to your financial plan, the better.
So, pay yourself first, calculate interest (both paid and earned), set goals, commit to them and don’t worry about anybody else but you. If all this feels a bit overwhelming, don’t hesitate to reach out to me and we can design a plan that works for you. Like I said, there isn’t a perfect solution that fits everyone’s financial situation. If you’re motivated to pay down your debt and keep aside money every month for your savings, you’ll set yourself up for a healthy financial future.
Remember: every bit of debt you eliminate puts you one step closer to your goals. Give me a call to discuss how I can help you stay focused on reaching your goals.