Consumer Watch: Should you save or pay off debt?
OKLAHOMA CITY (KOKH) —
It's the age old question: What is more important, debt pay off or saving money? Personal finance bloggers have no shortage of advice, but when it comes to being realistic here some basics to help you make your choice.
In a perfect world, you are both saving and paying down debt. The average amount of debt American households carry is around 140-thousand dollars, so living debt free sounds like a very alluring idea. The reality is it often means dedicating all of your free money to debt payoff, and it might not be the right choice for everyone.
“If you've got a younger person that has retirement 30 years away, that is probably a good scenario for them, but if you've got someone that is 55 and they haven't saved enough for retirement, they are going to get a little bit skittish about that,” says Melinda Warren, Co-President of Hughes Warren Incorporated.
Before deciding on what to aggressively tackle first, you need to back up, and do some prep work.
“Make a plan. First of all, you want to create a budget and make sure that you know what your income is, what your expenses are, and then you want to sit down and identify what the debt is,” says Warren.
No matter whether you are aggressively saving or paying down debt, you should always be saving for retirement and have an emergency fund. For some people an emergency fund might mean an extra thousand dollars, but the perfect number is three to six months of expenses.
“You want to make sure that you have an emergency fund, so if an emergency occurs, you have a little bit of cash to fall back on so you don't get further into debt,” says Warren.
You should be paying for your debts while you build your fund. Once you have some ‘just in case’ savings, you can confidently start diverting your cash to aggressive debt pay off.
Focus on paying off debts with the highest interest rate first. That is usually credit cards. Continue to pay minimums on all your debts and aggressively pay of one. Then, focus on the next one until you are done.