You will likely need to ask this question frequently as you begin making increasingly important financial decisions throughout your life. In fact, as you read this, many people across the country are trying to determine what is most beneficial for their financial health: pay off their debts as quickly as possible or save their money for other things.
This is a difficult question to solve since everyone’s financial situation varies. A person might have accumulated a lot of high interest consumer debt, another person might not have it. Same thing for savings. People’s priorities differ with regard to the money they earn and save. Some people want to stock money to buy a house or for retirement, while others prefer to spend their money to live their lives to the maximum before settling. However, both choices come with their pros and cons, and the opinions vary a lot. While our advice may not be appropriate for your lifestyle or financial goals, we see many Canadians asking themselves this question. Here are our tips for people who are currently juggling between saving and paying off their debts.
Pay off your debts first
Debts, especially consumer debts from credit card balances, are something that most of us will experience at one time or another. Since consumer debt accumulates over time, it may take some time before we realize the seriousness of the situation. High interest debt is a particularly serious problem because the longer a consumer waits to pay, the more it will cost him dearly. In addition, if you are a regular user of credit cards, it is likely that you will need to reuse these cards again before you have paid off your total balance. Then, if you continue not to pay your balance completely from month to month, you could end up in a vicious circle of revolving debts.
The advantage of paying your debts first is that you will be able to break the vicious circle of debts and start saving properly.
In fact, if you have a lot of high interest debt, it’s probably best to get started and pay off as much debt as possible as quickly as possible. In any case, your monthly minimum payments will decrease, making your debt more affordable.
Be aware that the consequences of not paying your debts can be just as, if not more serious than not having saved money. If you do not pay your debts, you may suffer the onslaught of a collection agency, which may seek to get a payroll seizure from you or any other legal action. This scenario is not limited only to high interest credit card debt. There are other types of loans that can definitely put you in the hot water if you fail to pay them back. Missing a payment on any type of debt is never a good idea, you will have to pay a fee, it will damage your relationship with the lender or creditor and the health of your credit will be affected greatly.
In the long run, repaying a debt saves you money, which can then serve you for productive purposes, such as retirement, owning a home or having an emergency fund.
The biggest disadvantage of paying off all your debts is that you could end up with very little or nothing in the face of an unforeseen situation that could arise in the near future. Unfortunately, you never know when an emergency may occur and you would be taken without money. If all your money has been used to repay your debt, you will no longer have emergency funds to get you out of this delicate situation. You will then have to load everything on your credit cards, creating a new, even larger, revolving debt, even if you try to get rid of it.
You will also have less money to invest in other avenues, such as in your pension plan. This means that you may not be able to retire at the age of 65 and will have to continue working in the next decade.
When it comes to saving, one of the most important practices you can maintain is to use some of your hard-earned money to create an emergency fund. In fact, many financial experts will recommend you to have the equivalent of 6 months of typical expenses in your emergency fund. On the other hand, a good deal of the money you make should also be spent on your retirement, and invest in an RRSP account. In any case, the advantage of prioritizing savings to pay off your debts is obvious, you will have access to money for your current and future expenses, in case an unexpected situation arises.
This brings us to some other benefits that come with saving your money. The main benefit is, of course, that in the face of an unexpected expense, you will not have to wait for your next pay check before you can handle the situation. However, there are other places where saving would be of great benefit to you. Once you have surplus money, you can set up an automatic transfer so that a specific amount is deposited into your RRSP. An RRSP account is an excellent financial tool. First, any amount you contribute to your RRSP is tax deductible. With an abundant RRSP, you can not only retire earlier and with greater ease than those who do not have savings, but you can also take advantage of the RRSP Home Ownership Plan if you decide to buy your RRSP. ‘to buy a house. The Home Buyers’ Plan allows you to withdraw money from your RRSP to fund the down payment of your home. You will then have 15 years to repay this money.
The downside of saving your money instead of paying off your debt is pretty clear. Letting your debts go out of control can lead you to a situation where it will be even harder to solve other financial and debt problems in the future.
And, once you have fallen into the trap, it can be extremely difficult to get up. The longer you allow your debts to accumulate, the more difficult it will be to pay them back. As a result, your credit will be negatively impacted, which will lower your credit rating and make it more difficult to approve a loan. Even people with a lot of money can have a low credit rating, so imagine not having money because of your constant debt combined with poor credit.
What is the best answer?
The problem with this question is that you have to look at both sides of the coin and that the answer depends a lot on a person’s financial situation. Many professionals will tell you that paying off your debts should be your first priority. Again, it depends on the type of debt you have to pay back. High interest debt can lead to serious financial problems. So it’s best to handle the problem before it gets out of hand. However, a low interest rate debt of another type of loan may be easier to manage because of low costs and repayment schedule.
So your best mie will probably be working towards stability, using both options to achieve a balanced budget and lifestyle.
For high-rate debt, it may be beneficial to spend as much money as possible on the repayment, or at least to repay more than the minimum monthly payments. Then you can set aside for your emergency fund. The best thing about a typical savings account is that you can add anything you want. After all, every dollar counts. Then you will have a background to help you in the event of an unforeseen situation. Once you have found a way to balance your payments and savings, you will have learned an important lesson on financial stability.