Two of the most important financial goals to have is to pay off debt and save money, but both are not always possible, so which one should you be doing first? Or are you able to do both?
It may seem that it would make sense to pay off your debt first, especially when you are carrying a high interest debt but it is also just as important to have savings like an emergency fund so that you have money to fall back on if something were to happen and this way you won’t need to go into further debt.
Here is how you can decide which one to do first or if you can do both at the same time.
Pay Your Debt First?
If you are carrying high interest debt like a store card, credit card or a personal loan then it is a good idea to prioritise these first. High interest debt like this is hard to get out of and is usually the reason that many South Africans are spiralling into debt.
With this type of debt, you should always aim to pay more than the minimum each month. This may require you to make cutbacks. Bringing down your debt means that you will pay less in interest and in the long run, will have more available to save.
If you aim to plan off your debt first, then avoid any further debt as this will just make the situation worse.
Should You Save First?
There are some good reasons as to why you should save first even if you have outstanding debt to pay off. The main reason is to build an emergency fund. When an unexpected expense comes up, you will be able to pay using your emergency fund and avoid getting into more debt. If you don’t have enough to cover the full expense from your emergency fund then you can at least part pay and use a personal loan to pay for the rest and limit the amount of debt. A personal loan usually carries a lower interest rate than a credit card, which makes it a better option if you have to go into some debt.
If the debt you are carrying has a low interest rate, then it will make sense to put money towards your savings. You ideally need to have enough money saved up to cover between 3 and 6 months’ worth of your income.
So What’s Best?
The best way to reach your financial goals is to do both if possible. You will want to get rid of debt and save money at the same time, so look at a way for you to split your money between the two.
For instance, if you have budgeted R1000 for savings but are carrying high interest debt, then split it 50/50. It may mean that you are paying a bit more interest but you will gain peace of mind knowing that you have some money saved up.
This won’t always be possible depending on your debt situation, so if you feel that it is more important to first focus on your debt and cut that down then do so. It all depends on your financial situation.
If you are carrying too much debt, then it might be an idea to speak with a debt counsellor to get advice. They will help you create a payment plan and if you are over indebted then you may want to consider a debt consolidation loan.
If you need help with debt, then keep reading for a plan to pay off your debt.
Your Plan to Pay Off Debt
You are not able to ignore debt because this won’t make it go away. If you want to get out of debt, then you need a plan and financial discipline. Here is a plan for you to pay off your debt, so that you can start saving and become financially healthy.
What is Your Debt?
The first step into paying off your debt is to own your debt and find out how much debt you have. You will need to look at all your statements and find out exactly what your monthly repayments will be for the next month and how much you owe overall. It is also a good idea to get your credit report, which you can get for free. Make a list of all your debt from the lowest to the highest.
Create Your Monthly Personal Budget
Once you know what your debt is, you will need to create a personal budget so that you can work out how you are going to pay your debt back and how long it will take. You need to look at your spending habits and see where you can save money. You may need to cut back on nights out, takeaways and so on. There are always areas where you can cut down and save even if they are just small savings as these will add up.
Which Debt to Start With
When it comes to paying off your debt there are two ways to go about it.
Paying the highest interest debt first will help you to save money in the long run, especially if the debt with the highest rate is also the one with the highest balance. This will take the longest to pay off, so you may lose motivation to carry on with this if you don’t feel like you are making progress, which is why the second way might be the better option.
The second way is to pay your lowest balance first, which offers instant benefits. When you can pay off your lowest debt first, you will gain motivation to carry on tackling your debt and you will free up money that you can use to pay for your next debt and so on. This can be the best way to start tackling your debt.
Pay More than the Minimum
When you only pay the minimum on your debt you won’t get very far because of the interest rate. If you want to pay off your debt faster, then you should look at trying to pay double the minimum. Take a look at your budget and see where you can cut down so that you can pay more towards your debt. You can set up debit orders, which will ensure you stick to your debt repayment plan.
If you feel you are over your head in debt, then speak to a debt counsellor that will be able to help you with your finances and pay off your debt. Another option is to opt for a debt consolidation loan, which will combine your debts into one and will give you one lower debt repayment each month, but you will need to make sure this is the right option for you.