A single right answer cannot be provided to this question since multiple variables affect it based on the type of debt and savings options toppled with the person’s needs. The majority of people would suggest that debt should be paid off first, but it is not always so. Financial and long term goals must be taken into account to know if it’s more important to pay off debt over saving money.

The financial aspect will be discussed, targeted towards investment’s returns. Bigger returns can be obtained by saving money in high yield accounts instead of paying off debts. For example, if the owed amount’s interest rate is less than the savings account rates, saving will make more money. On the other hand, paying debt first, if the interest rate obtained from a savings account is much less than the rate for a debt, makes more money. Furthermore, debt repayment is simply paying back the principal amount with interest to prevent owing even more in the next billing cycle. Interest rates are the key to know which option to choose. Depending on the type of debt, interests can range from 3.5% for mortgages to hundreds of percentile points for fast loans. In addition, savings accounts average a return nationwide of less than 7%.

However, some financial experts say that savings should always come first. This is based on the idea that if an emergency occurs, money will be readily available. This is not true for people that pay debt without saving anything. In emergenciesthis type of person would have to resort to acquire loans or use a credit card, which compounds for more debt, with usually higher rates since the funds are needed in a hurry. This scenario will upset the entire budget that was set to manage debt.

All financial advisers do agree on onetopic, accumulate no more debt. Both scenarios, either savings or debt payment, prove to be better for the economic well being if followed. For instance, savings pay for urgent expenses such as car repairs and medical bills. Moreover, debt payment provides more free money on a monthly basis on hand to cover such emergencies.

In the end, find a balance between the monthly amounts set for savings and debt payments. The best method would be to split money evenly between them. For example, if there is a $500 extra per month, $250 could be saved and $250 could be set to lower debt. Priorities need to be set in order to make the right decision and choose the correct path for your financial well being.

This article is provided courtesy of Credit Season, a consumer finance website providing information and tools on personal loans for bad credit and other personal credit services.

This entry was posted on Thursday, May 3rd, 2012 at 3:57 pm and is filed under Debt. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.