Debt vs Savings: A Common Dilemma

Many people wonder how to use their extra money wisely. Should they pay off their debt or save it for the future? They may worry that if they focus too much on debt, they will miss out on saving opportunities. Or they may fear that if they save too much and ignore their debt, they will end up in a worse financial situation.

There is no one-size-fits-all answer to this question, but there are some general guidelines that can help. Dave Ramsey, a popular financial expert, has some useful advice on how to prioritize your money goals and follow a plan.

The first step is to get rid of any high-interest debt, such as credit card debt or personal loans. Anything that has an interest rate above 6% or 7% should be paid off as soon as possible. This will free up more cash flow and save you money in the long run.

The next step is to build up your savings, especially if you have access to any employer-sponsored retirement plans that offer matching contributions. You should aim to save at least 10% to 15% of your income for retirement. This will help you secure your financial future and take advantage of compound interest.

The final step is to decide what to do with any remaining money after paying off high-interest debt and saving for retirement. At this point, the interest rate on your debt is not high enough to be a major concern, so you have more flexibility. You can choose to pay off your low-interest debt faster, such as student loans, mortgages, or car loans. Or you can choose to save more for other goals, such as an emergency fund, a vacation, or a home improvement project.

The most important thing is that you are using your extra money for something productive and beneficial. You are already ahead of most people who spend their money without a plan or a purpose. So don’t stress too much about whether you are making the optimal choice. Both paying off debt and saving are good for your financial health. Go with the option that gives you the most peace of mind and satisfaction.