Saving or Paying off Debt – Which one should I choose?
If you are lucky enough to come into some money, the first inclination for most people is to hand it right over to the credit card companies. While this isn’t a bad idea, you should never sacrifice your savings to appease the credit card gods. When it comes to paying off credit cards, slow and steady really does win the race.
The first thing you should do is make out a budget. Map all of your sources of income and then denote all of your expenses. If you have more coming in than going out, than you are in good financial shape. You can put 50 or 60 percent of your extra income every month away for savings, and then use the remaining money to target one card at a time. This is one time when paying the minimums is actually a good idea because it frees up money to target one card especially hard. Once that one card is paid off, switch your attention to the others and go from there.
The biggest reason why you shouldn’t pump all of your extra funds into paying off your credit cards is that you don’t know what is hiding around the corner. As many people can tell you, everything can be fine one moment and then a natural disaster or life-changing event can happen, and before you know it, you are going to wish you had your savings back to help dig yourself out of that hole. We can only prepare so much for unplanned events in life and that nest egg is extremely important to have.
If your income is in even better shape, you should also take a piece of your income pie and use it towards investments. No one wants to work forever, and by making sound and stable investments now, you can develop a portfolio that will help you retire sooner rather than later.
The importance of saving can’t be overstated. No one wants to be forced to live off their credit cards and if you sacrifice your savings to get (temporarily) out of credit card debt, you aren’t doing yourself any favors. Even if your credit score is in the toilet, you will be much better off in the long term by taking a measured approach to savings, investment and getting out of debt than if you act rashly and don’t save just to get out of credit card debt.
If you want to rush along the process some, you can apply for a consolidation credit card at a low interest rate. This way, you can move the balances of your cards to one central location and it will enable you to pay down your overall credit card debt faster, while still managing your budget properly and putting money away for savings. But be careful to read the fine print. Many consolidation cards have low, temporary or introductory rates that expire after a few months. Once these rates end, you might be stuck with an interest rate that was just as high if not higher than the one you had to begin with. Make sure you read the fine print located with the disclosure statement located on the back of your credit card offer. A few seconds of extra reading now could save you some serious interest down the road.