To save or to pay off debt first? This usually shouldn’t be a dilemma as savings is always a good and undisputed choice. But what happens in the case when you have debt on your head? Do you then save and invest your money? Or do you focus on early debt settlement? That’s when the ‘To save or not to save?’ dilemma rings in. And it can be quite a tricky one.
Let’s make matters a little easy for you by stating downright, choose the option that adds to your long-term financial security.
Simple Calculations
Financial calculation and evaluations don’t always have to be complex. Like this one that we’re telling you to do here, isn’t. The rate of interest at which you acquire a loan should always be less than the rate at which you earn from your investments.
Type of debt
The kind of debt that’s on your head also determines whether you should opt for early debt settlement or rather invest.
For instance, if you are dealing with loans like home loans, offered at around 4 percent per annum, it makes better sense to continue the mortgage and invest in areas like stocks, property and systematic investment plans. In such a case, debt is the cheaper option.
On the contrary, in case of expensive loans, say for example credit cards issued in the UAE at around 40 percent APR, debt can pile up at a rapid pace. As such, it is more practicable to settle these debts before you consider investing.
What if there’s no ‘extra’ money to save or to pay off debt ?
Then thou must focus on enhancing your income. Perhaps work overtime, or switch your job for a better paid one, strive to get a raise or promotion, or do something that generates additional revenue on the side, like a freelance job maybe?
If this doesn’t float your boat, then you must try and cut down your expenses to make way for some spare money. Cancel under-utilized subscriptions, dine out less often, maybe save up on paid entertainment avenues and replace them with free ones. Consciously work your way out to evaluate where and how you can save money, as more savings equal more leverage when it comes to investing or debt settlement.
[Related Article: Quick Tricks to Build Your Emergency Fund]
Don’t forget to factor in Rainy Days
With majority of your income devoted towards settling debts and meeting everyday expenses, there is little to none left for contingencies. Nevertheless, make sure you create a fund for those, as rainy days do come unannounced. Hasn’t Dubai seen a literal example of that very, very recently?
Getting back to the dilemma we started with, it is always advisable to set aside an emergency fund before you even think of ‘To save or not to save?’ Doing so will eventually add up to your financial well-being by making available a decent fall back amount in the event of, say, maybe a loss of job, an un-provided-for medical treatment, etc. Your emergency fund, then, should be as much as your 3 to 6 months’ worth of living expenses.
To conclude, we’d just like to say balance your instinct – to have either financial freedom or to have a long-term payoff – with sound financial knowledge which is imperative in making an informed decision.