Should You Pay Down Debts or Increase Your Savings?

by Darwin on September 21, 2022

It is an age-old question that just about everyone has a different opinion on. Should you pay down your debts first or contribute to your savings? Most financial advisors argue that you should try to do both at the same time. However, there are a variety of factors that should help you decide whether to prioritize one over the other. So, in today’s guide, we will help answer the titular question for you and hopefully help you meet your long-term financial goals!

Evaluating Your Interest Rates

A lot of people favor paying down debts first because, in 99% of cases, you lose a lot more money to your credit card or loan interest than you gain from savings accounts or even high-yield investments. So, you need to really evaluate the kind of interest rates you have on your debt. For example, if you have 20% APR on a credit card and 1% APR on your savings account, you should definitely focus on paying down your credit card debt first. Alternatively, if you have a new credit card with a zero-interest introductory APR, you should probably use that time to contribute to your savings or investment portfolio.

Determine Your Liquidity Needs

Paying off debt feels good and it can save you a fortune in the long run, but it also means that you have less cash on hand. With savings accounts and even most kinds of investment vehicles, you still have access to your money if and when emergencies arise. For example, let’s say that you have a medical issue or you want to finally deal with that back pain that has bothered you for years (in which case you might contact a specialist like those at ThriveMD), you need to be relatively liquid so that you can pay for the treatment. Otherwise, you will have to go further into debt every time a new expense comes up.

Shop Around For The Best ROI

As previously mentioned, traditional savings accounts cannot compete with the costs of credit cards or even low-interest loan debt. Consequently, the question isn’t always about whether or not you should focus on savings, but where you’re putting your funds. More often than not, investing in the stock market, real estate, or other vehicles for financial growth can offer much greater gains. However, they also come with more risk. This means that you should evaluate the ROI and your ability to handle financial risk for the long term.

Consult With a Financial Advisor

Finally, it’s always good to get professional advice if you feel that you are at a crossroads with your finances. The whole “paying debt vs. increasing savings” debate almost always comes down to your individual needs, goals, and circumstances. Fortunately, a financial advisor (or even a robo-advisor) can help you find the best strategies to grow your wealth and reduce your debt as quickly as possible.

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