Dollar Dilemma: To Save Or To Pay Off Debt, That Is The Ultimate Money Question

Have you ever taken a look at your savings account and your debt and wondered if the former should be ultimately used for the latter to pay down or off the debt entirely?

This question abounds quite frequently if you have money set aside in an emergency fund or if you have extra money leftover at the end of each month after you pay your bills. The first thought is whether to save or pay more toward debt, both of which have their added value but only one can be your choice when extra money is part of the equation.

Of course, putting money into a savings account gives you that peace of mind, knowing that in the event of an unexpected circumstance you won’t have to borrow money or go further into debt. This money puts you at ease and allows you not to fret if your car needs to be repaired or that emergency dental surgery isn’t covered by your insurance.

That said, if you’re doing a side by side comparison that extra money should be put toward any debt that you have, particularly if you are pushing your debt ceiling on your credit cards or lines of credit.

If your balance is $5,000 and you have a balance of $4,500, that doesn’t do your credit score or standing with creditors any favors. They see that debt ceiling being way too close for comfort and thus are more apt to turn you down for additional loans until they see that amount a lot lower than where it currently stands, for example.

In this instance and if you have multiple lines of debt, you should take any extra money and put it toward that debt (or any outstanding debt you have that is substantial).

The one caveat to the discussion is if your debt is that of a lower interest rate variety. Credit card debt or other lines of credit ultimately have a higher rate, and thus you’ll want to throw the kitchen sink at it in the form of extra payments when you can afford to do so.

If you’re talking about low school loan rates, your mortgage or even a car that is between four and five percent, you might want to put that money into your savings account after all. Some would argue that paying more on any of those three items allows them to get paid off faster, which is obviously true but you won’t save as much on interest as you would with a credit card sitting at 10 percent interest or higher.

In the end, overall it’s best to focus on pushing debt down even in the face of not having money saved for the proverbial “rainy day.” Once the debt is gone, you can refocus on rebuilding and reclaim your savings once again.