If you are still reeling from the effects of the Covid19 health crisis of last 2020, you might be asking yourself if you need to save money now or pay off debts. This is a tough question considering that you need to focus on both. For this year, you need to make sure that you are able to pay the debts you took on last year. While doing that, it is also important to start saving for emergencies as well.
If there was one aspect of personal finance that was highlighted during the height of the pandemic last year was the need to have a strong reserve fund. At a time when a lot of people lost their jobs or asked to put in fewer hours at work, it impacted their income. This meant that they would have less money coming in every month for expenses and savings.
If you find yourself in this situation and you were not able to save money in the past, you might begin to rely on your credit cards. This means you will be charging and swiping most of your expenses on your card. And with income not as strong as before, payments at the end of the month will be a challenging task for you.
You could also be trying to think of focusing on your debt payments to help you save interest payments in the future. Rather than paying the minimum on your debt accounts, paying them off would help you save interest, fees, penalties, and other charges your lender might add to your account. With this in mind, what do you prioritize and do first?
Save money or pay down debt?
The problem lies with limited funds or even if you get your income back to what it was, you want to make sure you are able to accomplish both. In doing so, you improve and strengthen your finances and ready for any emergencies that could come along. Now the challenge is understanding where to focus first. This is an important decision since Pew Research shared that one in every four adults had difficulties in meeting their bill payments.
Save first while making the minimum payment on your debt accounts
It is possible that you focus on your savings first because you want to have that financial cushion in case another crisis hits the economy in the coming months. You still remember how it felt to rely on your credit cards to buy all the essential needs at home like food and water. Your credit cards could have been paying for your utilities as well.
At the end of the month, you do not even want to open up your credit card statements because you are afraid of the total amount you have to pay. This could be one of the reasons why you want to save money over debt payment. And to a certain extent, it makes a lot of sense. You simply want to make sure that you have money when you need it.
But even if you focus on your savings, you cannot completely overlook the fact that you need to pay your debts. This means you would be making minimum payments on your accounts for an extended period of time. What this means is that you have to make do with paying interest and other fees that come with it. This is where you start thinking about what if you focus on your debt payment?
Aggressive debt payments
You can also explore the possibility of focusing more on your debt payment rather than saving money for emergencies. It does not mean that you will not set money aside anymore for rainy days. It just means that you will be putting in more of your income and try to lower your monthly payments as opposed to setting big amounts for emergencies every month.
Then it is just the other way around where you focus on debt payments. You save a small amount for emergencies because your goal is to aggressively pay off your debt obligations. This means making payments over the minimum amount every month. This is important as CNBC shares that 80% of cardholders had a difficult time making minimum payments on their accounts. If possible, you can also start to completely pay off accounts one month after the other.
You can focus on either the accounts with the highest interest rate or those with the lowest total payment. It will either give you the chance to save money from having to pay huge interest payments in the future or give you small wins you can build on. You can then use the money to pay for the next account until you pay everything off.
Factors to consider when deciding what to prioritize
Before you decide what you will focus on, you need to take into consideration your current financial situation. It helps you have a comprehensive household budget to help you determine where you are with your finances. This will give you an idea if your income at present is enough to cover all your payments and expenses or not.
This is because before you can even decide, you need to figure out how much income you have every month. You also need to consider the needs of your family especially when you have a lot of children. In fact, this can be your deciding factor whether you save money or pay down your debts. If you want to prioritize the financial security of your family, it would be better to save for your emergency fund while making minimum payments on your debt obligations.
But if you are in an industry that has been minimally affected by the health crisis or you started a business that is doing good, you can choose to pay debt obligations first. This way, you get to save interest payments and put that money either in savings or to reinvest it again and grow your business.
You can do both at the same time
The good news is that you can actually save some money for emergencies while you pay down your debt. The idea is to pay the minimum amount on your debt obligations just so you stay current. There might be additional interest payments and other fees but it will not be as big as when you do not pay them at all.
While you pay the minimum on your debt accounts, you can start saving a small amount for your reserve funds. This way, you stay current on your payments while you build up the habit of saving for emergencies. When you see an improvement in your finances, you can then choose to put more in your emergency fund to strengthen your financial cushion in the future.
If you can cover all your payments but having a problem managing each and every single one of them, you can consider consolidating your debts under one account. If you have 5 different credit cards you pay every month and cannot stay on top and monitor each of them, debt consolidation seems to be a great repayment option for you. This frees up your time in managing other accounts and gives you time to focus on saving money as well.
It is tough to save money when you have a lot of debt payments but it is not an impossible task. With proper planning and the right tools, you can actually do both at the same time. This is important considering the health crisis could have put your finances in the red.