Should you pay down your debt, save, or both. There are several personal finance experts who think it is a bad idea to save while still drowning in debt. I do not necessarily agree with them.
This is a question that comes up often. Should you pay down your debt, save, or both. There are several personal finance experts who think it is a bad idea to save while still drowning in debt. I do not necessarily agree with them.
There are plenty of news stories out there talking about the massive amount of debt, according to a January 22, 2021, CNBC article, the average American has $90,460 in debt. This number includes all types of consumer debt products, from credit cards to personal loans, mortgages and student loan debt.
Using 2019 data from credit bureau Experian, they were able to break down the debt by age. Personal finance education is important, so you know where you stand. Reading advice, listening to podcasts or just talking about it will lead you to a better understanding and help you make better decisions about your financial health.
Here are the average debt balances by age group:
Again, these are averages. There are some that are much higher and of course, some that are lower. What we must keep in mind is that debt is something that will keep you from having true financial freedom. But the question here is, Do I pay down debt first, do I save first or can I do both. I personally think you can do both. There are times when it makes sense to save first. If you do not have an emergency fund, you need to make that a priority. Not having an emergency fund just leads you down a path to more debt. Now that does not mean you stop paying your debts to save. We all know what can happen if creditors do not get what is owed to them. (I used to be a debt collector) This just means that you continue to make your minimum payments on all your debts while putting every bit of money into a savings account. Once you have at least $1,000 in an emergency fund, you then start paying down your debts. Another reason to save first is to take advantage of an employer sponsored 401k plan that matches. Giving up an employer match is literally giving up free money. Now, I do not know about you, but I love free money. Yet there are so many people out there who don’t contribute to their 401k plans and just give up free money. I know what you may be thinking, “I can’t afford to contribute.”
It’s not as hard as you think. Let me break this down for you.
If your company offered a 50% match, that means for every dollar you contribute, they will contribute $.50. For easy math, let’s say you make $50,000 per year and you contribute 5% of your pay. That equates to $2,500 per year and another $1,250 per year from your employer for a total savings of $3,750 per year. Now let’s say they match dollar for dollar. That would be an additional $2,500 to your contribution of $2,500 for a total of $5.000. Let’s break this down even more. If you get paid biweekly, that is 26 paychecks equal to $1,923.07 pretax. Now if you contribute to a traditional 401k that would be $96.15 deducted from your paycheck pretax. Meaning you will only have to pay taxes on $1,826.91. Now if you get paid weekly it breaks down to $48.07 per week pretax. (Now how many of us spend that going out to dinner? Getting our weekly Starbucks, or anything else really). And let’s not forget the company match. It is a very painless way to automate your savings, sort of set it and forget it. You work hard for your money, why not let your money work hard for you.
Other than these two examples, I believe it would be beneficial to pay down debt first. Debt is like a chain, holding you back from really having the life you want. So many people don’t realize the underlying stress and anxiety in their life is caused by financial troubles and I can help solve them.
Creating a spending plan, living below your means, budgeting, setting realistic goals (yes, realistic is the key word here) and other financial lessons are not taught in school. I had to learn them just like you, “life lessons.”
Most mistakes people make are not saving enough for retirement, not creating a budget and not living within their means. I can assure you; it does not have to be that way. You can learn all these lessons, just like I did. We all want to live the good life, buy our dream home, raise our kids and give them more than what we had. There is absolutely nothing wrong with those goals. It’s the choices we make to get there that are not always the smartest. A truly happy financial life is attainable. You just need to have the information, desire, and the will to get it.
