In Simplepenny Credit we take every opportunity we have to remind you that saving is very important. If you want to enjoy a healthy economy, be protected against unforeseen financial problems and sleep with a clear conscience at night, you must save a small percentage of your income every month. But … what to do before: pay debts or save?
Because we also like to remember the dangers of debt. In a society like the current one, in which at all times we receive incentives to buy things and spend money, and in which access to credit is too easy, the possibility of over-indebtedness and living above our means is always present.
The million dollar question is: if I have debts and want to save, what should I do before: pay debts or save? In this article we will do our best to resolve that doubt, but we anticipate you since the answer will not convince everyone.
Pay debts or save, what is more important?
We start from two premises: the first is that today almost everyone has some debt : mortgage, car loan, credit cards, installment purchase in some establishment, etc. However, not all debts are equal or have the same cost.
The second is that, with a public pension system that makes water, we should all save for our future . In addition, the sooner we start saving and investing, the more and better we will benefit from the power of compound interest.
If our priority is savings, we will have to continue paying interest for debts that we do not pay off; and if we choose to prioritize and reduce them, we will have to give up having an emergency fund for contingencies.
Consequently, as you should already be imagining, the solution does not go through choosing between one option or another , since the opportunity cost of both decisions is quite important. So why not do both at the same time?
Each situation is different
We should find a balance between saving and debt payment that fits our specific case. In this way, each month we will allocate part of our income to usual expenses, another part to prepay debts and another to savings. The percentage of each will depend on each person or family.
On the other hand, it is worth remembering that if you have several debts and one of them is a credit card with a very high APR, you should give priority to the payment of this debt over, for example, the mortgage, which has a much lower interest. The snowball method is the most effective for canceling debts successively.
There is no absolute answer that is valid for all cases
Based on our current economic conditions and our priorities we will have to decide what is most important to us and make a decision accordingly.
If you need us to give you a hand to decide what is best for you, whether to pay debts or save, do not hesitate to leave a comment and send us your case. We will be happy to help you.
If you need an extra help, at Simplepenny Credit we can offer you a fast credit of up to 2,500 euros (800 if it is the first time you request it) to return flexibly and in comfortable terms. It is very simple and will only take ten minutes. There is hardly any paperwork!