In an ideal world, we’d all have zero debt and ample savings accounts. But that’s simply not our financial reality. In fact, less than half of Americans have enough savings to cover their bills and other expenses for three months. And families with credit card debt owe over $6,000 on average.
It’s a double-edged sword: it’s important to reduce your debt, but if you don’t have savings, unexpected expenses can cause you to fall behind.
If you have little or no savings, your first goal should be to build an emergency fund. Most experts recommend saving enough to cover three to six months of expenses, but even a small nest egg can help. (Keep making monthly payments on your debt while you save.)
Once you’ve saved enough to cover minor emergencies, the best next step depends on your personal situation. Understand the benefits of each to make the choice that’s right for you.
Saving money and paying off debt are both important. But depending on your financial situation, you may need to focus on one over the other. Ask yourself these questions to decide which balance works best for you.
Which is more disruptive to your financial stability – your debt or your lack of savings? The answer to this question will be different for everyone.
If you’re drowning in high-interest loans, it might make sense to pay down these balances first. Carrying debt over the long term isn’t ideal. The longer you owe, the more interest you pay – especially if you’re paying off high-interest credit cards.
If your debt is relatively low-interest, and you’re on a tight budget, it might make sense to beef up your savings account first. There’s less wiggle room for emergencies when you’re living paycheck to paycheck, and a healthy safety net can protect your financial stability.
Worrying about money can be extremely stressful. It’s valid to consider your mental health when you’re deciding whether you should pay off debt or save money.
If you’re dodging creditors or constantly worrying about your credit card bill, it may be smart to tackle your debt head on. But if you’re losing sleep worrying about major expenses in your future, it might help to beef up your savings account a bit first.
To understand if you should pay off debt or save, get clear on your financial goals. Do your long-term goals require positive credit? You might want to start paying down your debt sooner or later. Or, will saving money allow you to afford something – like a car or apartment in a central location – that will help you improve your life situation?
Learn more: Why Budgeting Is Important for Building Credit
Opening a savings account doesn’t affect your credit score directly, but it has important second-hand benefits. With a healthy savings account, you’ll be better prepared for unexpected expenses. This means you’re less likely to fall behind on bills, which can be damaging to your credit score.
There are many strategies that consumers can use to start paying off their debt. Here are some of the best debt payment methods:
Pay off your debt quicker and save money on interest by making more than the monthly payment. Even a small amount extra can have a big impact over time – just make sure to check whether prepayment fees or penalties apply.
Making multiple payments can keep your credit card balance from piling up throughout the month. It also may lower your credit utilization ratio – an important factor in your credit score.
Start paying more than the monthly minimum on your lowest-balance debt. Once you pay it off, snowball what you were paying into your next-smallest debt. Slowly work your way up to the most expensive – without ever increasing the total amount you’re paying each month.
Should you pay off debt or save money? There’s no simple answer. It depends on your personal situation and financial goals. Fortunately, when it comes to building credit – the choice is easy.
With StellarFi, you can build credit with the bills you pay each month already. Just link your expenses – like your rent, utilities bill, and even your Netflix subscription – and we report your positive repayment history to the three major credit bureaus: Experian®, TransUnion®, and Equifax®.
It really is that simple. Check out StellarFi and set up your account in three minutes or less.
StellarFinance, Inc. and its affiliates do not provide financial, tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own financial, tax, legal, and accounting advisors before engaging in any transaction.
With StellarFi, your bills are paid on time and reported to Experian® and Equifax®.