Whether you’ve gotten a reverse mortgage to dig yourself out of a financial hole, come into some money and are ready to start a more effective approach to budgeting, or are just trying to live a more financially savvy life, you are probably debating a common issue: save money or pay off debt? Opinions abound on each issue. Some financial planners will tell you that paying off debt doesn’t give you anything, so you should save first. Others point out that the interest payments associated with debt are inevitably higher than those associated with saving, so nixing the debt first makes sense. The truth is that you’ll need to consider several factors before making the decision.
Can You Lower the Interest on Your Debt?
The interest you will pay toward debt is almost always much higher than the interest payments you will accrue from savings. This means that, when all other factors are equal, you should pay off your debts first. Of course, all things rarely are equal, so you need to explore all options for paying off debt. One of the best things you can do is transfer your balances to a low or zero-interest card. Then, dedicate yourself to fully paying off the debt until the balance is wiped clean and the introductory period ends.
Do You Have an Emergency Fund?
What would happen if you were hospitalized or lost your job tomorrow? If you would end up homeless or be immediately unable to pay your bills, it does not matter how much debt you have. You need to begin building your emergency fund right now. Plan on having at least three months of income on reserve; if this goal seems out of reach, a thousand dollars or so should help you get started, and then you can build as you go.
What Are You Saving For?
If you have an emergency fund and a retirement account, contemplate what you want to save for. If it’s just to have extra money or to be able to indulge in a luxurious vacation, you need to take care of your debt first. But if you’re saving for a specific need with the power to improve your life—such as moving out of your children’s home or moving into an excellent assisted living facility—saving might be more important than paying down your debts.
How Does Your Debt Affect Your Life?
There’s a difference between owing a few thousand dollars on your credit card and having debt that consumes your life. Not only that, but the source of the debt matters; student loans usually have low interest rates and even lower consequences, but debt to the IRS can ruin your life. And if you’re not making the minimum payments on your debt, you could find yourself in serious legal trouble. Who needs the added expense of paying lawyers to defend you against civil lawsuits?
Carefully think about the way your debts affect your life. Are you overwhelmed and hopeless? Or just eager to pay your debts down so you can gain more control over your life? Financial decisions play a key role in psychological well-being, so consider how your choices will affect your overall wellness.
Annie Doisy is industry expert who helps seniors enhance their lives by taking advantage of the equity in their homes.