Save or Pay Off Debts: Which first?

Saving money can give you financial security. In instances of extreme emergencies, your savings can get you the necessary finance that you could end up relying on. We save money because it gives us security for our future and because we cannot anticipate what can happen.
Getting yourself accustomed to setting aside money on a regular basis is the best technique to save for things you like. It can be an expensive holiday in Hawaii, a grand birthday bash or a wedding. You could be saving to buy a car for yourself or to finance a course you intended on pursuing but never did.

In the long run, you can even think of retirement. It seems farfetched if you are young, but nevertheless, it is advisable that you plan for it beforehand. You can save money in other ways for the future by making mindful investments which will give you good returns, although pensions seem like the typical and most common choice for retirement. If there is a certain lifestyle that you intend to have, then there is no harm in thinking about it and to start managing your finances accordingly in order to attain that. In the short run, spending on things which you want to buy tempt you and you end up spending on it with the help of loans and credit cards but these will cost you money and in some scenarios could even land you in major debts. You need to make provisions in order to tackle your repayments properly without landing yourself in a humungous debt trap.

Saving a decent amount of money can make your life so much easier if you train yourself to do it on a regular basis. Some reasons which should strongly drive you towards adopting saving as your second nature are listed below:

Individualistic Outlook and Being Self-Reliant Financially:  Saving up money will give you the freedom of making choices that you would want. It will give you the financial ladder for your plans on spending your savings the way you want it. Being financially reliant cannot be confused with being rich but your savings will let you know that you do not need to lean on your monthly pay cheques to make certain choices. Savings that you can rely on will make you feel on top of the world.

Save 50% on Everything You Buy: If you frequently use credit cards to pay for all your purchases then, chances are that you do not pay off your credit card amount in full every month as the interest charges are added to it owing to your purchases. You end up paying at least 50% more on all your purchases and this will eventually land you in major repayment tangle. In order to avoid this, you need to stop relying on your credit card purchases and make provisions for your expenses beforehand. By saving in advance you can make better spending choices.

Buy a Home or a Car: If you have saved up money enough to cover at least the down payment that you will need to make in order to buy a house or a car, then you are good to go. But buying a car or a house entails various other expenditures that are a part and parcel of the deal. You need to have provision for that as well. Savings to the rescue!

Provision for Unanticipated Expenses: You cannot anticipate what is going to happen in the near future, as emergencies may unexpectedly crop up.

Having debts and being unable to pay them off can turn ugly and you will find yourself in a debt trap which, try as you might, will be very difficult to pay off as it has accumulated to an extent where it will put a strain on your pocket. Due to lack of real motivation behind being unable to clear the accumulated debts, many plans fail to reach fruition. In order to keep the velocity of your debts pay off on the go, you need to constantly remind yourself of the various reasons for which you need to be debt free and how that is going to improve your finances. Your debts will spiral out of control if you do not handle the situation correctly.

Looking at the bigger picture, in the long run, paying off your debts as a priority over saving is going to save a lot of your money. Debts generally are more expensive and you end up paying more in comparison of what your savings earn. Cancel out on your debts and you would be better off. To simply put it across, whenever you save money you are in fact extending a loan to the bank for it to forward to other people where eventually the bank earns its profit which is the difference between the amount/rate at which it loaned money from you that is the savings rate, and the rate at which it charges its customers that is the borrowing rate. This explains that in the overall scenario, it will always be more expensive to borrow money than the earnings on your savings.

People who have both savings and borrowings many a times with the same bank is basically lending you money that you lent to it in the first place in addition to charging you quite a bit more.

Unless you have a proper level of income which will shoulder paying off of debts, you will not like it. But if you do have the saving, it is strongly advisable that you clear off the debts on an immediate basis as the accumulation of high balances will entail you for years.  Here are some reasons to push you towards paying off debts over saving your money:

Liquidate Paying Interest:  A large number of credit card holders pay an interest regularly on a monthly basis, which can sometimes add up to more than 20%. This is owing to the high rate of interest against paying off your credit debt. If you only pay your monthly minimum, it will be an ever bigger hassle as you pay a large part of your monthly minimum towards the interest charges and not the principal amount.

To Figure out the Costs of Your Debts: You need to make this simple list and calculate all your debts and interest against each debt. This should give you an accurate idea of how much you need to pay. The next question that you need to ask yourself is how much exactly your saving is earning you. You will notice that your savings are earning you less and the debts are costing you more. But utilizing your savings to pay off the debts will decrease the costs that you are incurring whilst owing them.

Determination of your Financial Goals: Knowing your financial goals can be of assistance as your financial goals will determine the cash cushioning that you need to have. If you have plans to start off a business in the near future, then you need to have more reserves. In such a case clearing off your old debts is recommended as you will not want the additional horde of loans that will create barriers to your future plans and goals.

To Prioritize on Paying off Debts with Higher Rate of Interest: Higher rate of interest will accumulate and adversely affect your finances and before you know it, you will find yourself in large debts. Hence, prioritizing on debts with a higher rate of interest is recommended.

Saving money and paying off debts are two sides of the same coin. A quick rundown of both aspects, let us know that paying off your debts first over saving money is more advisable whilst considering the bigger picture because  no matter what, debts are always going to cost you more than savings will earn. It is better to pay off your pending amount so as to save up for the future and for a better financial security. In the current times, you as a customer need to be abreast with all the schemes available in order to make wise investment choices for your savings.

Alexandra May is a problem solver. Coffee trailblazer. Passionate creator and a Financial aficionado specialising in helping victims of mis-sold PPI

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