Everyone has some form of debt. Whether it’s credit card debt, or loans, or even just money you borrowed from a sibling – debt is debt. Debt happens because of many legitimate reasons, not just because of bad spending habits.

But there’s more to your financial status than just debt. For those in this situation, the question becomes, when does saving take priority over paying off debt (and vice versa)? While it is suggested by financial experts like Suze Orman that you eliminate debt as soon as possible, sometimes you have to take into consideration other factors, and figure out exactly when to save or pay off debt.

Here’s a look at some of the things to consider when making that choice.

What’s the interest rate on your debt?

If the interest rate on your debt plays between 5% to 7% annually, it’s ideal that you pay that off before making any further progress towards your savings.

If you’ve already got some money saved up, you can put it towards paying down a debt with an interest rate 7% or above as you’re more likely to save money in the long run.

You may be looking at the Php 10,000 savings that earn 1% or 2% interest in a bank, and the same amount of debt garnering 2% or 5% in interest and thinking that the interest on your debt isn’t as bad. You’d be wrong.

Do the math for any of the debts (loans, credit cards, etc.) you have. At the same time, look at your savings (retirement, investments, emergency, etc.) and list down each one’s respective interest rates. You’ll see that each debt is costing you hundreds of thousands of pesos every year, while the growth of your savings can’t match it.

Look to pay down the largest debts as soon as you can. That way, the amount you’d originally devoted to that can go elsewhere as the cost of interest is ultimately what makes your debts balloon over time.

Do you have an emergency fund?

While paying off your debt is crucial, having money on a rainy day is just as important. Remember that an emergency fund need not be huge chunks of your paycheck stashed away, but can be smaller portions placed in a savings account over time.

Consider building this even while you devote most of your extra money to paying off debt, as it will help reduce any dependency on credit cards should you go through a rough financial patch. An emergency fund could help prevent you falling into a debt trap in the future.

Could you use your savings now to reduce your debt?

If you’ve built up some savings, you may want to consider using those savings to lop off a portion of the debt you have remaining. It will hurt, but at the very least you’ll have more leeway once your debt has been cleared.

Let’s say you have Php 30,000 saved up, earning 0.1% max in the bank, in case of emergencies, but you’ve also got a credit card debt in the same amount with an 3.5% monthly interest rate, which you pay Php 2,000 a month. While your savings gets you Php 30 a year, you’ll end up paying a whopping Php 11,116 in interest on your credit card (and it will take you 21 months to pay it off).

If you use your savings to completely eliminate your debt, you’ll be debt-free. Your savings might be gone as well, but now you can start fresh, and concentrate on building up your savings without fear that you’re losing money to interest payments.

You can also automate your debt payments when allowed so that you feel the pain of your savings being temporarily diverted less.

Another major positive to paying off your debt is that it reflects well on your credit history, meaning you will be in a better position to qualify for products like home loans later on.

So, should you save or pay off debt?

Ultimately, you should strike a balance between paying your debts and saving. Doing both at the same time may limit the funds you have to work with on a daily basis, but will at least allow you some room to move. It’s all about making a practical decision towards making your financial health as green and glowing as possible.

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