Should You Pay Your Debts Before Saving?

Should You Pay Your Debts Before Saving?
  • Opening Intro -

    Most Americans have both savings and debts.

    While saving can be encouraging and satisfying, paying a debt is tedious and discouraging.

    Many people believe that it should therefore be their first priority, before they invest or save.

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Unfortunately, that’s not always the best practice and is dependent on an individual’s financial situation, it might make sense to invest and pay the debts later. The most important thing to consider before making a decision is the type of debt that you find yourself in. There are three types of debts;

1. High interest debt

Any credit card loan that has an interest of more than ten percent is classified as a high interest debt. It is of utmost importance to pay off the debt to avoid paying much interest on the debt plus you may not want to find yourself in a situation where the interest you pay is more than the interest you earn.

2. Low interest debts

These types of debts are much more manageable and have lower interest rates. Car loans and personal line of credit loans are in this category.

3. Tax deductible debts

Mortgages and student loans fall under this category. They are tax deductible and have the lowest interest rates and quality for tax deductions.

It is of utmost importance to pay off the high interest debts as soon as possible, it is also much important to ensure that you have a secure financial net. Before paying a debt however, it is important to set an emergency fund.

view the steps on reducing credit card debt

Paying your debt is a low risk investment

Individuals with no debts have diversified portfolios on high and low risk investments. When paying off your debt you can count your tax deductible low interest debts as low risk investments. This is because although you might be paying interest instead of earning one, you are adding to your net worth by shrinking your debts.

Choosing to save over paying a debt is a personal decision

Before you consider saving over paying debts, you need a financial advisor to help you determine your comfort level with the debt, risk tolerance and the balance right for you. Identifying your real expendable income, creating a budget out of the income and the size of debt is one way to ensure that you are making the right decision.

Moreover, experts say that without any savings, focusing on solely repaying debts can be a setback when unexpected costs come up. Such circumstances push individuals into borrowing again.

Do you think saving before paying off debts is worth it? Or do you think that paying your debts before you can begin saving is the way to go? Share the posts for your friends on facebook to hear what everyone thinks.

 
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Last update on 2017-07-23 / Affiliate links / Images from Amazon Product Advertising API

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