Is it better to be debt free or have savings?
Building up your savings each month as you pay down debt ensures you'll have funds on hand to cover unplanned expenses that would otherwise put you deeper into debt. For many, the best solution is to strike a balance between saving money and paying off debt.
If you have savings, it might be worth repaying some of your loans or credit cards – but only if you still have some savings set aside for emergencies and it doesn't end up costing more in fees. High interest charges on the most expensive forms of debt make it harder to put money aside, so clear these first.
Financial experts agree that you should generally invest your extra cash rather than accelerate paying off low-interest debt, but still some people place immeasurable value on being debt-free or owning a debt-free home.
In general, it is mostly best to pay down debt before investing. The risk of investments is usually greater than the risk of paying debt. Investing money that will be matched by an employer is better than paying off debt as you get ``free'' money.
Better savings potential: losing your monthly debt repayments gives you more money in your pocket. Interest paid on debts is often higher than interest earned on savings, so clearing your debts first boosts your savings potential and gives you extra cash for your financial goals.
The 50-30-20 rule is a common way to allocate the spending categories in your personal or household budget. The rule targets 50% of your after-tax income toward necessities, 30% toward things you don't need—but make life a little nicer—and the final 20% toward paying down debt and/or adding to your savings.
Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time. Credit cards are convenient and can be helpful as long as you pay them off every month and aren't accruing interest.
Saving is often most advantageous when the cost of borrowing—interest, annual fees, late fees, origination fees, and more—is higher than you are comfortable with. Generally, the higher the cost of an item, the higher the costs of borrowing will be.
Consider the snowball method of paying off debt.
This involves starting with your smallest balance first, paying that off and then rolling that same payment towards the next smallest balance as you work your way up to the largest balance. This method can help you build momentum as each balance is paid off.
Unsecured debt reduces income available to meet basic needs and ensure financial stability. Financial literacy and coaching can be important components of a comprehensive set of corrective actions but will not adequately address the problem on their own.
Is saving money a good idea?
Most people know they should be saving a portion of their income, but they might not grasp all of the benefits of doing so. Saving is an important habit to get into for a number of reasons — it helps you cover future expenses, manage financial stress and plan for vacations, just to name a few.
Other measures—including net worth, retirement savings, living without debt, and financial flexibility—are not directly related to income. A high-income person with a lot of credit card debt may not be as rich as a debt-free person with a modest income.
Building up a savings account helps ensure you'll be able to afford emergency expenses without going further into debt. Following a debt repayment strategy ultimately helps reduce the amount you're paying in interest, and it also frees up money to use for other purposes.
Investing has the potential to generate higher returns than paying off debt. This is especially true over the long term. However, there are risks when you invest, and high returns are not guaranteed. That's why experts suggest starting to invest early on, so you have a long enough time line to weather market downturns.
Of course, what the readers are really asking is if going into debt is worth the impact to their personal finances. The short answer: It's usually not. When you're in debt, you limit your options and you have less control over your money and your future.
“While money does not make one exponentially happier after a baseline amount of reasonable well living, below that and certainly debt does detract from happiness,” she says, adding that the closer one gets to the baseline reasonable living number, the more likely they are to feel the positive impact of paying off debt.
The Bottom Line. Getting out of debt and staying out of debt is a laudable goal, and it's not bad for your credit score as long as there is some activity on your credit accounts. You can accomplish this without debt if you use credit cards and pay the balances in full every month.
"Shark Tank" investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.
While this figure can vary based on factors such as location, family size, and lifestyle preferences, a common range for a good monthly salary is between $6,000 and $8,333 for individuals.
It's best to start saving as early on in your career as you can, but no one has a time machine to go back and begin stashing away money earlier if they procrastinated a little longer than they should have.
How much of income should go to savings?
Aim to save at least 20 percent of your take-home income each month. Experts recommend stashing away 3 to 6 months' worth of living expenses. Automate your savings and increase your contributions over time.
If paying off the debt would drain your savings or compromise your ability to meet basic needs, it may be better to prioritize essential expenses and explore other solutions. For instance, you might negotiate a payment plan or settle the debt for less than the full amount.
Living without debt can offer immense benefits, but whether it's “better” depends on your goals and financial situation. Being debt-free means you're not tied to monthly payments or accumulating interest, which can free up your income for savings, investments and experiences that bring you joy.
Both options have their benefits, but the decision largely depends on your financial goals, interest rates and risk tolerance, among other factors. Paying off your car loan can offer peace of mind and free up monthly cash flow, while investing may allow you to grow your money over time.
No one-size-fits-all answer exists for the cash-versus-credit question. Saving up and paying cash may make it possible to negotiate a better price. Use of credit may make more sense for a larger purchase, especially if it's something that appreciates in value, like a home.
