The journey to financial freedom usually starts with one question – should you pay off debt or save first?
Many people have some form of debt, whether personal loans or credit card debt. Most people, especially at the beginning of their financial journey, don’t have the proper financial safety net.
Both of these things are hard on their own, and many wonder whether they should first pay off debt or save. Prioritizing both can have pros and cons, leading us to the best solution. Balance.
In this article, we’ll explain:
- Why you should prioritize saving;
- Tips for saving;
- Why you should prioritize debt reduction;
- Tips for getting rid of debt;
- The ideal approach;
- How to gain financial independence with the concept of Infinite Banking.
Let’s determine the advantages and disadvantages of saving and paying off debt!
Firstly, let’s look at why you should prioritize saving over paying off debt.
Why You Should Save First
Saving can be pretty hard, but it has some advantages you should keep in mind:
- Taking care of unanticipated expenses
- The advantage over paying off a low-interest debt
- Compound interest on savings
- Retirement planning
As we’ll explain later on, saving money for emergencies is a must. Unexpected expenses that you’re not ready for can accumulate your debt.
Because of this, savings should also be prioritized over low-interest debt that you have more time to pay off.
Starting savings early is also essential because of compounding interest. Whether you have a normal or a high-yield savings account with a big annual percentage rate, that money will grow exponentially over the years because of compounding interest. The earlier you start, the more money you’ll gain.
Similarly, starting to save early for retirement planning will lead to more growth in your retirement account.
If you have trouble saving, you can always find budgeting and money-saving tips to help you out.
Tips for Saving Money
Now, let’s see some of the main tips to help you save money.
It’s Okay to Start Small.
The first thing you need to remember is that it’s okay to start small. If you can’t reach any huge saving goals that you see other people do, start with a low number that’s realistic for you and your budget.
Even if you start with a couple of dollars, it can only snowball from there.
These first dollars should be a part of your emergency savings, which we’ll discuss next. It’s a good idea to target specific amounts, like a month’s rent or a predetermined figure.
Saving money takes time, and while it does require self-discipline and work, you don’t need to rush into it immediately.
Building your emergency fund is super important because you never know what could happen, and any emergency expenses can lead you to even more debt and make you lose money. This is why you should start saving now in case an unexpected expense pops up.
For example, your credit card debt could grow if you don’t have enough emergency funds to fix an unexpected expense, like an unexpected car repair.
As we said before, it’s okay to start with small contributions, but an emergency fund is essential for financial planning.
The best advice is to start building your emergency savings for monthly living expenses. The next step is to keep adding extra money to that amount until you reach figures for three months, six months, and even a year worth of expenses.
Financial experts suggest stashing your emergency fund savings into a high-yield savings account. Still, it might be a better option to save this money in cash, so it’s easier to access in case of an emergency.
Saving for Retirement
To most people, building retirement savings might not seem like a priority when they’re faced with the question of whether they should pay off debt or save. But, the truth is, the earlier you start retirement planning for personal finance, the better off you’ll be.
According to data, one in three Americans has $0 saved towards their retirement.
After you’re done settling your financial situation by building the emergency fund, turn to retirement savings. Whether you choose to go for a 401(k) or an individual retirement account (IRA) for your workplace retirement plan, make sure you’re contributing to it and letting it grow over time with the help of compound interest.
Also, don’t miss out on the employer match on a 401(k) retirement plan. That’s free money!
Always contribute enough to ensure you get the maximum employer match. This free money isn’t something that you can get retroactively.
Other Savings Goals
Lastly, once you finish building your emergency fund and sort your retirement savings, it’s time to turn to other savings goals.
Whether it’s for a child’s college education or a little trip overseas, turning that extra cash to other goals is essential for our well-being. Starting an investment account and focusing on the stock market is another step you can take.
These goals are entirely personal, and they depend from individual to individual. If you have trouble determining your financial targets, you can always get help from a certified financial planner or a tax advisor to see where your journey leads.
Getting Rid of Debt
According to the Federal Reserve, the American household debt reached a record $14.6 trillion in the spring of 2021.
Now, let’s look at why you should prioritize debt repayment and tips on making it more manageable.
Why You Should Pay Off Debt First
There are a couple of reasons why paying down debt should be your priority:
- High-interest rates are bad for long-time repayment
- Getting rid of an emotional burden
- Credit score improvement
First off, if you have any debt with very high-interest rates, you should pay it off as soon as possible and become debt-free. This is the main reason for prioritizing debt reduction over savings in personal finance. That being said, building your emergency fund should still be a priority over debt payments.
High-interest debt will accumulate over time if you only make the minimums for it, which can significantly impact your financial freedom. As you’ll see later, this type of debt should be your priority. This is especially true for high-interest credit card debt.
Next, paying down debt is generally an emotional and mental burden. Reaching that point where you manage to pay off your debt can be very freeing.
Finally, paying off debt leads to a better credit score on your credit report. This, in turn, can get you more financial advantages as time goes by. A bad credit score negatively impacts your other possible loans and mortgages.
Tips for Debt Reduction
Here we have some of the best tips for debt reduction.
Get Rid of the Worst Debt First
As we mentioned before, debt with a high-interest rate can have a severe negative impact if you’re only making minimums. This type of debt, especially on credit cards, is an example of toxic debt.
Interestingly enough, collective American credit card debt dropped to $73 billion in 2021, which is a 9% decrease from 2019.
Other forms of toxic debt can come as payday loans, car title loans and rent-to-own payments.
Always start with the highest rate of debt and always pay more than the monthly minimum. Paying toxic debt and its interest charges is one of the best financial decisions you can make.
If you have trouble figuring out the payoff method, you can use online debt financial calculators to help you out. There are also a couple of different payoff methods you can find online.
Finally, you can also turn to a nonprofit credit counseling agency for a debt management plan to help you out.
Determine Your Budget
This might seem like a given, but you can’t expect to pay off your debt healthily without determining your budget first.
Budgeting is an essential step whether you want to pay off debt or save money.
The first step you need to take is going over budget. How much money do you take home each month? What are your expenses like? How many funds can you allocate towards debt reduction?
There are a couple of budgeting methods you can try out. The ones that we would recommend include the envelope method and the 50/30/20 method.
The envelope method is based on predetermining the budget for certain expenses like housing, bills, groceries and similar things and distributing that cash into envelopes.
In the case of debt reduction, it might be better to go for the 50/30/20 method, where 50% of your budget goes towards regular monthly expenses, 30% is fun money, and 20% goes towards savings. You can play with these percentages and put a portion of your money away towards debt reduction.
Make All the Minimum Payments
We mentioned that only making the minimum payments for paying down debt is terrible for high-interest debt. However, you should get rid of other debt with low interest after finishing up with the most toxic ones.
In the case of debt with a very low-interest rate, whether it’s student loans, home equity or car loans, always make at least the minimum payment.
Not only will this eventually help you completely get rid of other loans, but it will also positively affect your credit score. Additionally, missed payments can come with late fees and lead to higher interest rates.
Keep It Balanced
So what is the correct answer? Should you save or pay off debt?
The truth is – you should do both. Balance is the key to everything, which is also the case for smart financial choices.
As we mentioned, there are some steps you should probably take first, like building an emergency fund and getting rid of toxic debt. However, all of these aspects depend on your own situation.
Maybe you don’t have an extremely high-interest credit card debt that you need to pay off first, and you can focus more on saving.
On the other hand, ultimately focusing on just one of these things isn’t safe. If you just focus on saving, your debt with interest rates and fees can spiral out of control. And if you just focus on debt repayment, you can get in trouble in the case of emergency because you didn’t build your cash buffer.
In the end, it’s essential to keep everything balanced.
Gain Financial Independence With Infinite Banking
Finally, it’s important to remember that paying off debt and saving are just the beginning steps in improving your financial life.
Securing your financial future can seem scary and lengthy, but some things can help you, such as the Infinite Banking Concept.
The only thing you need for this process is a Whole Life insurance policy.
Here’s how it works. Infinite Banking is a strategic method for utilizing your life insurance to create an endless banking system. To put it in other words, Infinite Banking means being your banker, just without the high fees and interests that aren’t good for you.
When you own an overfunded life insurance policy, you can borrow money from yourself using your policy’s cash value and repay it later. When you borrow money from yourself and pay it back with the set rate of return, you start banking for yourself.
Infinite Banking consists of a couple of steps. The first one is overfunding the cash value of the Whole Life insurance policy. This cash value is tax-free and accumulates as time passes by. Lastly, this lets you take out tax-free loans from the overfunded cash value.
All of these culminate to create your bank. Even when you take out a loan and spend that money elsewhere, your Whole Life insurance policy still earns dividends.
Infinite Banking is an excellent step to take if you want to reach your financial goals, control your finances and build wealth using the Whole Life insurance policy.
Choosing whether to prioritize debt repayment or savings can seem overwhelming, but the key takeaways from this article are that the best thing you can do is keep things balanced and not be afraid to start small.
We hope that you find this article helpful and that it helped you get closer to determining the proper steps and financial decisions to take to reach your goals.
Also, we hope that it made you interested in the concept of Infinite Banking with Whole Life insurance.
If you want to learn more about Whole Life insurance and get a step-by-step guide for reaching financial goals, feel free to sign up for our premium membership! We are looking forward to seeing you at the Wealth Nation community!