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To Save or Pay Off Debt? Do Both.

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Should I save or pay down debt? It’s not easy to decide, but for better or for worse, managing your money well often boils down to a series of choices like this. Picking one over the other offers pluses and minuses, but inevitably you may always feel a bit behind on your financial game.

As a personal finance writer, this is one of the most popular questions I receive from all generations. My short answer is that it’s always best to do both—pay down debt and save—simultaneously. Of course, depending on how severe your debt load is, you may choose to be more aggressive in one area versus another at a given point in time. But always, always attempt to do both.  Even if it means putting just $10 a week in savings so that you can put $75 a week towards your $3,000 Visa bill (carrying a 19% interest rate), at least you’re maintaining the habit of saving while seriously nursing your temporary debt hangover. And as we know, smart habits—and sticking to them—are the keys to financial growth and success.

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But as a culture, we have a bit of a problem. For the average American, saving offers little gratification, at least not in the big way that paying off debt does. Right now we’re saving more than ever before in recent history, but much of that is fueled by a need to save, not a want to save.

When we pay off debt, we sleep better knowing we no longer have to face another ugly statement in the mail. Our disposable income frees up and we feel, well, free.  Saving, on the other hand, is a bit harder to relish. It’s comforting, of course, to see your bank balance grow, but unless you save with ambition, save with a clear cut goal in mind, it’s not as exciting. In fact, earlier this week the National Foundation for Credit Counseling released a study showing that most Americans—89%—actually value paying down debt over saving. In general, many think being debt-free is a worthier cause.  The NFCC attributed this attitude to the availability of credit, saying in its release that our credit-infused world has actually made consumers more comfortable with having insufficient savings.  Heck, if you have a $20,000 limit on your VISA (with a 0% APR in the first year), who needs savings, right?

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But consider the fact that it’s currently taking unemployed Americans 40 weeks to secure a job. That’s 10 months where you may need to go without a paycheck. Do you have sufficient savings to continue to pay your monthly expenses? Or, consider how most Americans are not financially prepared for retirement and 39% expect to continue to work well into their 70s, due to a lack of savings. A credit card does not guarantee the same kind of security as cold hard cash in your rainy day account.

The notion that paying down debt is somehow better or more valuable is an attitude that can only lead to unhealthy choices and threaten your financial security. Saving money needs to be somehow balanced with paying off debt, again, even it means squirreling away as little as $15 a week to start and later increasing it once your debts are paid off. Every little bit counts, especially right now.

[Resource: What Drives a Credit Score?]

Image: Nick Bramhall, via Flickr.com

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  • http://www.thequarterroll.com Mike

    you are so right about balance. Especially considering the state of unemployment and social security. I also think it is very important to simply avoid debt all together.

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