Is It A Wise Idea To Save Money When You're In Debt?

Is It A Wise Idea To Save Money When You’re In Debt?

This post was written by Stacy Miller from kissyourmoney.com. Stacy’s blog aims to provide real-world advice, tips and tricks to make, spend and save extra money smartly.

Conventional wisdom says that you should focus on paying back your creditors when you’re in debt, but is this really the case?

 

When you’re in debt, saving money can actually be your best financial move under certain circumstances, especially when it helps you to escape from further financial stress.

 

In my experience, there are two reasons  you should save money in spite of carrying debt.

 

You don’t have money for covering unforeseen expenses

Developing an emergency fund while you’re in debt may seem like a bad idea. You’re already in credit card debt. So isn’t it your priority to pay off debt first? A valid question indeed. But there are a few things you need to consider even when you’re in debt…

 

Firstly, not all debts are of the same priority. Secondly, saving a significant amount of money can help you avoid financial problems in the future.

 

For instance, let’s suppose you’re paying off a credit card with an interest rate of 14%, and then your car breaks down. You need the car to travel to work, so you have to repair it urgently. Now, if you had been putting all of your savings on this card alone, then you wouldn’t have any free cash and would probably have to borrow more money to cover this expense. However, if you had an emergency fund, you could have easily used it to repair your car instead.

 

The problem is, money that you have already used to pay off debt can’t be spent on anything else. It’s gone. But, money in an emergency fund is easily accessible and can be easily withdrawn to cover urgent expenses. This is why it is critical to have a cash emergency fund.

 

Therefore, If you don’t have an emergency fund, I strongly recommend you devote a few months to save at least $1000 in an online savings account… Just make the minimum monthly payments on your credit cards in those months.

 

If you need a substantial period of time to save an emergency fund, then my tip is to use a balance transfer credit card with a 0% teaser rate. You’ll get 12 months to 18 months to pay off debt without paying any interest. All you need to do is pay the balance transfer fee of 3% to 5%. That’s it.

 

The interest rate on your debt is low

Usually, people try to get rid of debt fast because high interest rates have substantial costs in the long run. However, If you have debts with only a 4% or 5% interest rate, then you can easily build an emergency fund or contribute to a retirement account.

 

Contributing extra money to a retirement savings account will help secure the golden years of your life. If you’re in the USA, a 529 savings plan will help your kids complete their tertiary education, whilst minimising your financial burden. Depending on your circumstances, these may be more important considerations than simply eradicating a low-interest rate debt completely.

 

I’m not asking you to ignore a low-interest debt. What I’m asking you to do is make a budget, reduce your expenses, and continue to make minimum monthly payments.

 

Conclusion

Sometimes there are circumstances where saving makes more sense than paying debt. In cases where not saving could result in more debt, and those costs outweigh the obligations of your existing debt, you might be best placed to set some money aside for savings, rather than putting it all onto your debts.

 

TFC Disclaimer: Guest posts are posted in good faith. I cannot attest to the originality of each article. If you have any concerns about the content, please contact the author of the article outlined above. 

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The Flawed Consumer is a Gen Y consumer that is on a mission to achieve wealth simply by changing spending and lifestyle habits.

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