Saving and debt are two things that are on the opposite side of the spectrum. On one end, you are able to save from your income to help you prepare for whatever future goals you have. It can be buying your family a house so you can all create happy memories together. It can even be retiring early so you and your loved one can travel and see the world.
On the other end, you have debt which can essentially eat away on your income and lower whatever saving you can potentially put away. The bigger your debt payments are, the more it takes away from your funds. Just like how a big mortgage payment coupled with an auto loan payment, student loan responsibilities and card debt can all add up to a great amount.
However, you might be surprised to find out that although saving and debt are on the opposite sides of your financial journey, they have common denominators. Saving and debt seem to intersect at different points in your finances that it is best to understand them better. For both sides, there are benefits and disadvantage, pros and cons that would help you get a better understanding of the two.
You might start to ask if it is possible to save with a low income or more, with a huge debt amount. On the other hand, you might be wondering how you can pay off some of your debt accounts when you are even having a hard time-saving money.
Understanding how saving and debt can be good, bad, and ugly for your finances
Here are a few things you can look at to give you a deeper understanding of how the debt and saving can affect your finances in different levels.
The good in saving
It is pretty straightforward to understand the good things saving brings to your finances. For one, you get to enjoy a stronger financial standing because you are able to save for your future needs. This encompasses several funds such as retirement fund, rainy day fund, emergency fund and even saving up for big ticket items.
Saving money is one of the most fundamental lessons that you learn when you talk about your finances. When you were still kids, your parents would teach you how to put quarters and pennies into a piggy bank. When you got older, you start to look at savings from the perspective of your income and how much you can put away for the rainy day.
The bad in saving
You might now be wondering how could saving have a bad side. The benefits of saving money seem to outweigh any potential bad side. How can something as effective as putting away funds for future use have a downside? It seems illogical to even think about it when all you are trying to do is strengthen your finances.
One of the pitfalls, when you are trying to save money, is not identifying where you need to put it. Bloomberg.com shares that about two-thirds of Americans are not even putting any amount towards their 401(k). This means that even if you are saving money but you do not have an idea where to put them, you might be doing more harm than good.
The ugly in saving
There is also an ugly side to saving money. There is a difference between not knowing where to put your savings versus thinking your doing a good job with it but making terrible mistakes along the way. You might think that saving money is simply taking whatever you can spare and putting them in a savings account. Though it has some perks, doing this across the board can actually hurt you in the long run.
Case in point is if you are trying to save up for your retirement and you simply put the money in a savings account. The interest it will earn over the years will be so small that it inflation might simply negate the interest earned. It is better to put that money into high-interest earning funds so you can take advantage of compounded interest and a bigger nest egg in the future.
What to do
In light of all these factors, there are a few things you need to consider when looking at your savings. One is to identify the amount that you can comfortably set aside every payday. It might seem an easy step but there are a lot of factors that goes into this amount. Starting from the net income and expenses and understanding how much can be saved and for what purpose.
After defining the purpose comes an important step – where to put the money. There are a lot of financial tools to choose from and the decision depends entirely on you. You need to factor in the need as well as your risk tolerance. The higher the potential interest earned, the riskier it is. Just as with safe investments, it will produce a lower yield. Apart from savings accounts and checking accounts, there are investment opportunities to explore that can help you make your savings more hardworking.
The good with debt
Saving and debt are two things that are on different ends but crosses path more often than you think. This is where the good in debt comes in. Though there are things to remember before taking out a loan or debt, there are times that it is to achieve something good in your life. It helps you realize some of your life goals.
Taking out a student loan will help you pay for higher education which improves your chances in earning more in the future. A mortgage loan can help you realize your dreams of having your own home. A car loan can finally give you the ride that you always needed. Credit card debt gives you the ability to pay big ticket items on an installment basis.
The bad with debt
Valuepenguin.com shares that an average household has about $5700 in total debt for credit cards alone. That does not seem that all worrying but the challenge starts when people start believing that they do not have to make payments. That or they start thinking that the payment due date is merely a suggestion.
The ugly with debt
What this does is it adversely affects your credit score when you start losing focus on your debt payments. As you miss payments or send them after the due date, your score can take a dip. This can make it even harder for you to take out and borrow from lenders in the future. Approval could mean high-interest rates which could lead to bigger monthly payments.
What to do
One thing you can look into when dealing with debt payments is debt consolidation. It helps you address payments a lot easier given that you are able to consolidate and combine your payment accounts. If you have a better score than before then you could enjoy a lower rate. If you also choose to spread it over a longer period of time, you can get it to go even lower.
Saving and debt seem two completely opposite ideas but they are closely related than you think. The idea is to make sure that you have a plan for both so you can effectively save and use debt for your financial needs.