There’s a lot to think about when it comes to personal finances. Unfortunately, there’s no fool-proof guide that works for everyone.
How to save and pay off debt are two of the biggest questions facing consumers. Here are some tips on how much you should focus on saving and paying down debt.
Why You Should Focus on Saving
Everyone knows that it’s good to have some money in the bank. But simply having that knowledge doesn’t equate to it being reality. This is clearly shown through some of the savings statistics for typical Americans.
For instance, about 40 percent of people in the U.S. can’t come up with the funds for an unexpected $400 bill.
What does this mean exactly? Four out of ten people would have to borrow money or sell items in order to repay that money.
That’s pretty scary when you consider how many ways someone might have to come up with $400. This particularly punishes those with lower incomes, who often have to get worse insurance plans and other kinds of expense protection.
When taking this information into account, it makes sense why saving should be a top financial priority.
You don’t want to end up in a situation where you’re desperate to get money to pay for an emergency. This can lead to you getting buried in high-interest debt, straining relationships with family and friends or having to part with sentimental items.
Everyone should do what they can to save up to have an emergency fund. This is money that’s set aside specifically for unforeseen costs. It’s smart to have at least $500 in this kind of emergency account; but more is better.
Considering well over 60 percent of personal bankruptcies can be traced to medical problems, it’s wise to have savings set aside for the unexpected.
Furthermore, most people want to retire someday. You’re not going to be able to do that unless you’re putting some money into savings—and hopefully, investments as well.
Saving money is a long-term strategy that can pay off for those who do it well.
Why You Should Focus on Paying Off Debts
While saving is important, it’s not the only piece of your financial life. Debt is another huge factor.
Anyone who has been deep in debt knows it’s not a fun thing to carry around with you. People who are seriously struggling should consider the possibility of working with a debt relief agency.
Why is it so difficult to overcome debt? There are a few characteristics of debt that make such a pain.
The way you approach repaying your debt depends heavily on the type of debt.
But isn’t all debt equally bad? While you don’t necessarily want to be carrying debt of any kind, some kinds are tougher to deal with financially than others.
For instance, credit card debt is some of the most difficult to pay off. This is because credit cards come with some of the highest interest rates. Plus, people generally use credit cards to purchase items that don’t appreciate in value.
On the other hand, some forms of debt are actually considered good.
While you might be scratching your head at that thought, there’s a reasoning for this.
Home mortgages are typically thought of as one of the best forms of debt for consumers. Housing is a necessity, mortgages tend to come with low interest rates and real estate should in theory appreciate over time.
What’s important to understand is that the different kinds of debt should be paid off in different ways.
A low-interest home mortgage doesn’t need to get paid off with as much urgency as a high-interest credit card. Strategic debt repayment can make a huge difference in your financial life.
Everyone has a unique situation. Your savings and debt levels, types of debt you’re carrying, and possibly other factors, will determine how you should save versus pay down debt.
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