Why you should pay off debts before you start to save

When you have a steady income, a decent debt load, and plans to save for the future, where should you be putting your money first?

Should you shovel money into each category simultaneously? Or wait to invest in your future by paying off the debt right in front of you?

In this post, we're going to explain why putting money into debt and savings at the same time may be a fool's game that only extends the life and cost of your debt.

Focus on interest rates
As you know, interest rates are usually dramatically higher on debt than they are on savings.

For most savings accounts, an exceptional interest rate is between 2.5% and 3%. When you look at an average credit card APR, it'll probably hover around 20% in most cases.

So, when the interest you're paying out is higher than the interest you're earning, you're not making money at all.

A case for saving first
It's not always the easiest choice for everyone's finances to completely dismiss a savings account and pour everything into debt repayment. What if you don't have an emergency fund to fall back on in, well, an emergency? If you have no such back-up account it may make sense for you to save first, provided your debt is somewhere with a low enough interest rate.

Once you save enough in your back-up account, say three to six months' worth of expenses, it's time to zero in on your debt. Make sure you're choosing the right savings account with a stellar return rate.

Prioritizing debt repayment
If you have high-interest consumer debt, perhaps from a payday loan or credit card, paying it down first can help solve ongoing money management problems.

You do this through budgeting. See how much expendable income you have to allocate to your debt and put as much down as you can per month.

A balance-transfer credit card can allow you to consolidate your debts into one place while lowering the interest rates across all channels.

Strategize
Striking a balance between savings and debt reduction is a reality that many of us face on a monthly basis. You may end up paying more interest than you need to by paying in both directions, but having some extra money during an emergency can keep you out of the debt cycle.

Having a little savings going gives everyone some peace of mind too. Just take your time and prioritize your payments and you should be saving up for that little red Corvette in no time!
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