Thursday, 4 March 2021

As we all know by now, a pandemic isn't just a health challenge; it's also an economic challenge. Since the coronavirus pandemic hit, Americans' biggest financial regret has been not having enough emergency savings. Looking ahead, respondents to the same survey said their biggest financial goal is to pay off debt.

Clearly, the pandemic has made many of us rethink our financial habits and situations, and saving and paying off debt are both important financial goals. However, which one should be your top priority?

The right answer may depend on your particular situation. In some cases, paying down debt should be first on your list, while in other cases, saving should take top priority. The best of both worlds is figuring out how to do both at the same time. Here's how to figure out which path will work for you.

When to prioritize saving

If you have little to no emergency savings, it's wise to focus on saving before getting out of debt. That's because if you are faced with a financial emergency and have no savings, you'll probably have to take on more debt to manage the crisis. However, if you have emergency savings set aside, you can manage an unexpected expense or emergency without adding more financial stress.

Another reason to prioritize saving is if you have an employer-matched retirement savings plan. If your employer will match your contributions to your 401(k) up to 5 percent of your salary, for instance, you should do everything you can to contribute at least 5 percent to retirement savings. If you don't, you're leaving free money on the table.

Also, if your debt is at a very low interest rate, saving first may be the best decision. Currently, certain interest rates are historically low enough, so if you're paying very little interest on your debt, it may be worthwhile to focus on saving money before getting out of debt.

When to prioritize paying down debt

If you have consumer debt with a relatively high interest rate, such as credit card debt, you should prioritize paying it off. Lowering or eliminating your interest payments will put more money in your pocket than you'd make in the stock market or in a savings account. When you've freed up your funds by no longer paying interest, you'll be better able to focus on savings.

How to do both

Ideally, if you have consumer debt and little savings, you could prioritize both saving and paying down debt at the same time. The best way to do this is to create a budget that includes all your monthly and occasional expenses. Look for ways to trim the budget and free up extra money, such as cutting a streaming service, converting to a cheaper phone plan, and biking instead of driving.

When you have gotten your expenses as low as possible, include monthly line items for debt repayment and small contributions to savings. As you pay down debt, take the money you're saving on interest and add it to your savings contributions. Over time, and with discipline, you can accomplish both goals of building savings and getting out of debt.

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